1. What is the competitive situation faced by Wilkerson? The critical product in term of market competition is the pumps of Wilkerson Company. The pumps are Wilkersons major product line with a production of about 12,500 units per month. Pumps currently have the lowest gross margin among all products, because competitors had been reducing prices on pumps and Wilkerson adopted its prices in order to remain competitive and to maintain the volume. 2. Given some apparent problems with Wilkersons cost system, should executives abandon overhead assignment to products entirely by adopting a contribution margin approach in which manufacturing overhead is treated as a period expense? Our conclusion is, that they should not adopt a contribution margin approach, because we know that the current contribution margin of the major product (pumps) has a downward tendency and therefore the risk to generate a loss with the pumps is very high, because we know that there is a fast moving trend from production-run labor hours towards machine hours (automation) as well as an increasing tendency in shipping, packaging efforts. In general we can conclude that fixed costs are rising while the gross margin of our major product is shrinking. This is why we advise not to adopt a contribution margin approach.
3. How does Wilkersons existing cost system operate? Develop a diagram to show how costs flow from factory expense accounts to products.
The existing cost accounting system is based on a normal job costing system. The cost of purchased raw materials is recorded in the direct materials account, therefore either accounts payable account can be increased or cash account decreased. Raw materials are transferred into the work-in process account on the debit side and therefore deducted in the direct materials account. In the debit side of the WiP account – direct labor as well as MOH costs are debited as well (and in parallel credited on the direct labor account and the MOH account). When goods are finished, the WiP accout is credited for the amount of good finished, this amount is transferred to the Finished Goods account, which is furthermore credited for the same amount (and costs are transferred to COGS account) if goods are sold. 4. Develop and diagram an activity based costing model using the information in the case. Provide your best estimates about the costs and profitability of Wilkersons three product lines. What difference does your cost assignment have on reported product costs and profitability? What causes any shifts in cost and profitability? In order to calculate the activity-based overhead rates, we sue the information of Exhibit 1 and Exhibit 4:
Exhibit 1: Operating Results March 2000
Figures 2152500 271250 458000 336000 40000 Precentages 100,00%
Sales DL Expense DM Expense MOH machine-related expenses setup labor
receiving & production control engineering packaging & shipping total manufacturing overhead gross margin SG&A Expense Operating income (pre-tax)
180000 100000 150000 806000 617250 559650 57600
Exhibit 4: Monthly Production & Operating Statistics (March 2000) Valves 7500 3750 10 10 250 Pumps 12,5 6250 50 70 375 Flow Controllers 4000 1200 100 220 625 Total 24000 11200 160 300 1250 high production 24000 12000 180 400 1250
Production (units) machine hours production runs number of shipments hours of engineering work
Activity based overhead rates = activity cost pool / activity cost driver Machine related expenses = 336,000 / 11200 setup labor = 40,000 / 160 receiving & production control = 180,000 / 24000 engineering = 100,000 / 1250 packaging & shipping = 150,000 / 300
activity based overhead rates
machine-related expenses setup labor receiving & production control engineering packaging & shipping $ $ $ $ $ 30,00 250,00 1.125,00 80,00 500,00
Product Costs per unit
direct materials direct labor Manufacuring overhead by activity: machine-related expenses...