Development of a management cost accounting tool for the benelux market leader in the door manufacturing industry

Abstract

When in the year 1962 Marcel Theunis started manufacturing doors, he couldn’t even dream that 60 years and millions of doors later, in 2020 his company, Theuma, would be one of the biggest door & frame suppliers in Europe. In 2004 Theuma acquired Polynorm, a manufacturer of steel door frames with a plant in Nijkerk (NL), to gain access to the Dutch market. Finally, after several years of underperforming and heavy losses, the private equity group M80 acquired Theuma through a Management Buy-Out in 2019. The goal has been ever since to turn the water-making tanker back into the proud flagship it once was. That objective is coming closer every day. The Belgian branch already became profitable again, and this project should contribute to bringing the Dutch subsidiary closer to that profitability as well. The current cost accounting system in Nijkerk was developed over a decade ago, and hasn’t been updated since. On top of that, the persons with the knowledge about the system were fired years ago, with the result that the cost accounting system is currently a black box that needs to be trusted blindly. Today, nobody knows how much the production of a steel frame actually costs, so the main focus of our project was to develop a new, accurate cost allocation model. The new system should tell sales agents exactly when they are selling above the contribution margin, should tell finance which investments are not giving the expected return, and it should tell production management where the manufacturing process isn’t running at an optimal efficiency level. Right from the start, it was clear to us that we would opt for a system built on the principles of Activity-Based Costing because of its proven effectivity. After a few weeks, we made the decision to construct a specific Time-Driven Activity-Based Costing model. This method links every product with several production steps with a certain duration, and for each (activity) duration there is a cost rate, carefully compiled so that the right costs would flow to the right production steps. We split the costs in three big parts: production costs, customer costs and general and administrative costs. For both the production and customer costs a working model, ready to implement, was built, and together with the intended profit, G&A is contained in the overall margin that should be added to every order. Next to just delivering a new, functioning cost pricing system, we also analysed the current state of affairs in Nijkerk on the basis of our model in order to give valuable insights to the management of the company. We uncovered major inefficiencies in the production process, large discrepancies in price setting between different products, and millions of euros that can be saved over a time period of five years. In addition, the CFO asked us to explore which accounting method, direct or full costing, would be the best fit for the company. We found several reasons to opt for the direct costing method, and built our model in a way that it can immediately channel those direct costs to the accounting department. During the project we had to overcome several obstacles, but one recurring, crucial issue was the lack of a centralised data system where all useful data is stored, structured and made easily accessible. The data that is currently being gathered, a bare minimum compared to the potential, is widely spread over the different departments of the company.We strongly recommend that the construction of such a central database should be made a top priority in the future. Some top academics are already for a few years on a crusade, urging companies to treat their data as their most valuable resource. The memo is: jump on the train, or get left behind. A message the current management understood, as they are currently implementing one central ERP system for both facilities.