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    Wilkerson Company: Iim, Indore

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    Swapan Kumar Saha
    The document outlines the cost pools and cost drivers for different products at Wilkerson Company, and shows how implementing activity-based costing (ABC) instead of traditional volume-based costing reveals that flow controllers have a negative profit margin rather than the positive margin shown previously. It recommends that Wilkerson decrease prices for valves and pumps, stop producing flow controllers, and move to ABC costing to more accurately capture costs and inform pricing decisions.

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    Wilkerson Company: Iim, Indore

    Uploaded by

    Swapan Kumar Saha
    19 views4 pages
    The document outlines the cost pools and cost drivers for different products at Wilkerson Company, and shows how implementing activity-based costing (ABC) instead of traditional volume-based costing reveals that flow controllers have a negative profit margin rather than the positive margin shown previously. It recommends that Wilkerson decrease prices for valves and pumps, stop producing flow controllers, and move to ABC costing to more accurately capture costs and inform pricing decisions.

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    112062657-Wilkerson

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    The document outlines the cost pools and cost drivers for different products at Wilkerson Company, and shows how implementing activity-based costing (ABC) instead of traditional volume-based costing reveals that flow controllers have a negative profit margin rather than the positive margin shown previously. It recommends that Wilkerson decrease prices for valves and pumps, stop producing flow controllers, and move to ABC costing to more accurately capture costs and inform pricing decisions.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    19 views4 pages

    Wilkerson Company: Iim, Indore

    Uploaded by

    Swapan Kumar Saha
    The document outlines the cost pools and cost drivers for different products at Wilkerson Company, and shows how implementing activity-based costing (ABC) instead of traditional volume-based costing reveals that flow controllers have a negative profit margin rather than the positive margin shown previously. It recommends that Wilkerson decrease prices for valves and pumps, stop producing flow controllers, and move to ABC costing to more accurately capture costs and inform pricing decisions.

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    IIM,INDORE

    Wilkerson Company
    MAC-2
    Group 12
    1/11/2012
    Jagadeesh Putta, Mayur Macharla, Sarva Harish, Gali Stephen Stanley
    The cost pools and corresponding cost drivers are as follows:

    COST POOLS COST DRIVERS


    Machine-related expenses Machine hours
    Setup labor cost Number of production runs
    Receiving and production control Number of production runs
    Engineering Hours of engineering work
    Packaging and shipment Number of shipments

    Machine Related Expenses $336,000

    For Machine hours 11,200 $30/machinehour

    Setup Labor $40,000

    For Production runs 160 $250 / run

    Receiving and Production Control $180,000

    For Production runs 160 $1,125 / run

    Engineering $100,000

    Hours of engineering work 1,250 $80 / hour

    Packaging and Shipment $150,000

    Number of shipments 300 $500 / shipment

    Existing cost system:- Currently Wilkerson implements volume-based full costing. Direct
    materials and labor costs are based on standard prices of materials and labor rates. Indirect cost
    (overhead) is allocated to cost objects (products) in proportion to direct labor cost at the rate of
    300%.
    machine Receiving and Packaging
    direct direct related Setup production and total per
    material labor expenses labor control Engineering shipping unit
    VALVES $16.00 $10.00 $15.00 $0.33 $1.50 $2.67 $0.67 $46.17

    PUMPS $20.00 $12.50 $15.00 $1.00 $4.50 $2.40 $2.80 $58.20

    FLOW
    CONTROLLERS $22.00 $10.00 $9.00 $6.25 $28.13 $12.50 $27.50 $115.38

    Table: ABC costing for assigning variables

    Profitability analysis:

    volume based costing ABC costing


    flow
    controller flow
    valves pumps s valves pumps controllers
    Standard unit
    costs $56.00 $70.00 $62.00 $46.17 $58.20 $115.38
    Target selling $107.6
    price $86.15 $107.69 $95.38 $86.15 9 $95.38
    Planned gross
    margin (%) 35% 35% 35% 35% 35% 35%
    Actual selling
    price $86.00 $87.00 $105.00 $86.00 $87.00 $105.00
    Actual gross 46.32
    margin (%) 34.90% 19.50% 41.00% % 33.10% -9.88%

    Conclusions:

     Wilkerson can continue to decrease prices of commodity products (valves and pumps)
    since their margins are quite high, but need to react to negative profitability of flow
    controllers.
     Limitations of analysis is that our calculation of cost drivers and product cost doesn’t
    allow revealing the difference between individual flow controllers, although we know
    that they are customized.
     We recommend to move from traditional volume-based costing to activity-based costing
    because of the fact that high overheads were not showing the real picture regarding the
    cost of flow controllers.
     Having in mind the absence of price competition, customized nature of a product
    Wilkerson can change prices of individual flow controllers in order to secure healthy
    profit margin.
     Based on the ABC method of costing we conclude that Wilkerson can afford to decrease
    prices of pumps and valves to tackle price wars with competition and stop production of
    flow controllers.

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