Wilkerson Company

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Assessment 2 – Individual
By – Andrew Chan

WILKERSON COMPANY

Overview

Wilkerson Company is facing a decline in profits and has attributed this to a severe price cutting exercise in their Pumps line of products, dropping the company’s pre-tax margin to less than 3%, far below the historically healthy 10% margins.

It appears that gross margins on pump sales in the latest month had fallen below 20%, well below the budgeted gross margin of 35%. Although a recent increase to Flow Controllers by 10% seems to have been overlooked by competitors and have not caused an apparent effect on demand.

Wilkerson had always practiced using a simple cost accounting system in their business.

Cost Drivers
| |Valves |Pumps |Flow Controllers |TOTAL | |Production |7500 |12,500 |4,000 |24,000 | |Direct Labor |10 |12.50 |10 | | |Material Costs |16 |20 |22 | | | | | | | | |Machine Hours |3,750 |6,250 |1,200 | | |Production Run |10 |50 |100 | | |No. of Shipments |10 |70 |220 | | |Hrs Engineering |250 |375 |625 | | | | | | | | |Direct Labor Expenses |75,000 |156,250 |40,000 |$271,250 | |Direct Material Expenses |120,000 |250,000 |88,000 |$458,000 |

Action

Whilst a simple cost accounting system gives us the overall picture of the company, it doesn’t truly reflect an accurate picture of the performance of each product. In order to get a clearer picture of the situation, we need to examine the true relation of costs on each product based on their activities.

For this to happen, we need to use the ABC system to examine and identify the overhead costs of each product based on their activities. [pic]

|Machine |Set Up |Receiving |Engineering |Shipping | |$336,000/ |$40,000/ |$180,000/ |$100,000/ |$150,000/ | |11,200 |160 |160 |1250 |300 | |=$30 p/h |=$250 |=$1,125 p/run |=$80 p/h |=$500 p/ship |

Manufacturing Overhead Using ABC

| |Valves |Pumps |Flow Control |TOTAL | | |30x3750 |30x6250 |30x1200 | | |Machine |112,500 |187,500 |36,000 |$336,000 | | |1125x10 |1125x50 |1125x100 | | |Receiving |11,250 |56,250 |112,500...
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