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    Group 8

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    niraj
    1. Wilkerson's cost system allocates manufacturing overhead to products based on direct labor costs at a rate of 300%, which may not accurately reflect the true costs of producing each product. 2. An activity-based costing model would assign overhead costs to products based on the activities consumed by each product rather than direct labor. This would provide a more accurate view of product costs and profitability. 3. Shifting to an activity-based approach could change the apparent costs and profitability of Wilkerson's products by assigning overhead more precisely based on factors like machine hours, setups, engineering time, and shipments required for each.

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    Group 8

    Uploaded by

    niraj
    95 views20 pages
    1. Wilkerson's cost system allocates manufacturing overhead to products based on direct labor costs at a rate of 300%, which may not accurately reflect the true costs of producing each product. 2. An activity-based costing model would assign overhead costs to products based on the activities consumed by each product rather than direct labor. This would provide a more accurate view of product costs and profitability. 3. Shifting to an activity-based approach could change the apparent costs and profitability of Wilkerson's products by assigning overhead more precisely based on factors like machine hours, setups, engineering time, and shipments required for each.

    Original Description:

    MANAC Case: Wilkerson Company

    Original Title

    Group8

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    1. Wilkerson's cost system allocates manufacturing overhead to products based on direct labor costs at a rate of 300%, which may not accurately reflect the true costs of producing each product. 2. An activity-based costing model would assign overhead costs to products based on the activities consumed by each product rather than direct labor. This would provide a more accurate view of product costs and profitability. 3. Shifting to an activity-based approach could change the apparent costs and profitability of Wilkerson's products by assigning overhead more precisely based on factors like machine hours, setups, engineering time, and shipments required for each.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    95 views20 pages

    Group 8

    Uploaded by

    niraj
    1. Wilkerson's cost system allocates manufacturing overhead to products based on direct labor costs at a rate of 300%, which may not accurately reflect the true costs of producing each product. 2. An activity-based costing model would assign overhead costs to products based on the activities consumed by each product rather than direct labor. This would provide a more accurate view of product costs and profitability. 3. Shifting to an activity-based approach could change the apparent costs and profitability of Wilkerson's products by assigning overhead more precisely based on factors like machine hours, setups, engineering time, and shipments required for each.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    of 20

    Wilkerson

    Submitted to:
    Dr. Archana Patro
    Company
    Group 8
    Divya Sharma
    Aradhana Patwa
    Asmita Singh
    Deepali Gupta
    Ashima Goel
    Shabhnam Kerketta
    Sumeet Tigga
    Operating Results (March 2000)

    Sales 2152500
    Direct Labor Expense 271250
    Direct Material Expense 458000
    Manufacturing Overhead
    Machine related Expenses 336000
    Setup Labor 40000
    Receiving and production Control 180000
    Engineering 100000
    Packaging and Shipping 50000
    Total manufacturing Overhead 806000
    Gross Margin 617250
    General, Selling and Admin Expenses 559650
    Operating Income 57600
    Product Profitability Analysis (March 2000)

    Valves Pumps Flow Controllers


    Direct Labor Costs 10 12.5 10
    Direct Material Cost 16 20 22
    Manufacturing Overhead (@300%) 30 37.5 30
    Standard Unit Costs 56 70 62

    Target Selling Price 86.15 107.69 95.38


    Planned Gross Margin(%) 35% 35% 35%

    Actual Selling Price 86 87 105


    Actual gross margin(%) 34.90% 19.50% 41%
    Product data

    Product Valves Valves Pumps Flow Controllers


    materials per unit 4 components 5 components 10 components
    2@$2=$4 3@$2=$6 4 @ $ 1= $ 4
    2 @ 6 = 12 2 @ 7 = 14 5 @ 2 = 10
    1@8=8
    Materials cost per unit $16 $20 $22
    Direct Labour per unit 0.4 DL hrs 0.5 DL hrs 0.4 DL hrs
    Direct Labour $/ unit @ $25/DL hour $10 $ 12.50 $ 10

    Machine hours per unit 0.5 0.5 0.3


    monthly Production and operating Statistics

    Valves Pumps Flow Controllers Total


    Pruductuion Units 7500 12500 4000 24000
    Machine hourd 3750 6250 1200 11200
    Production Runs 10 50 100 160
    Number of shipments 10 70 220 300
    Hours of engineeing 250 375 625 1250
      1.      What is the competitive situation faced by Wilkerson?

    The competitive situation is different between the products.

    Pumps are commodity products, produced in high volumes for a market with high pricecompetition -
    price cutting by competitors led to a drop of Wilkerson’s pre-tax margin to under 3%, gross margin on
    sales for pump sales has fallen below 20%.

    Flow controllers are customized products, sold in a less competitive market with inelasticdemand at the
    current price range.
    Valves are standard, produced and shipped in large lots - gross margins have been maintained at 35%.
    Wilkerson is a quality leader, but this leadership may soon be contested by severalcompetitors.
    Although they are able to match Wilkerson's quality, there are no signs of price-competition as of now.

    Nevertheless, in the long-run Wilkerson should be prepared to compete on price.


    The price competition pushes Wilkerson to analyze its overhead costs, since no reserves of cost cutting
    are left in its supply chain.
    2.      Given some of the apparent problems with Wilkerson’s 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? Why or why not?

    The problem in the current pricing method used by Wilkerson is that the real manufacturingcost of each product is not realistic
    because of the high proportion of overhead costs whichare 806,000 of 1,535,250 (52.5%).

    The current method assumes the overhead costs are correlated to the labor costs at 300% rate,while many of the overhead activities
    are performed per product line regardless of the amountof units produced.

    The approach of treating the overhead expenses as a period expense, suggests that the product cost and profitability will be
    measured without overhead costs (by increasing the profitabilitymargins). This means there is a correlation between the variable
    costs (labors and materials)to the product price.

    The method doesn't consider the different activities performed for each product line.Although in a lucky way better reflects the real
    cost of the products, giving more weight of the overhead costs to the Flow Controllers, just because their material price is higher, but
    not
    from the real reason (higher activity costs), this solution is not good from similar reasons likethe current method.
    3. How does Wilkerson‘s existing cost system operate? Develop a diagram to show how costs flow from factory expens

    Wilkerson's existing cost system of is the traditional volume-based costing: Direct materialsand labor costs are based on standard prices of
    rates.
    In addition, themanufacturing overhead is also considered as cost and it is allocated in proportion to directlabor cost at the rate of 300% (B
    that there’s a direct relationship between volume of production of individual products and level of overhead).

    Product Valves Pumps Flow Controllers Total


    Pruductuion Units 7500 12500 4000 24000
    Direct Labor Costs 75000 156250 40000 271250
    Direct msterial 120000 250000 88000 458000
    Total direct Costs 195000 406250 128000 729250
    Overhead Costs @300% 225000 468750 120000 813750
    Total costs 420000 875000 248000 1543000
    w from factory expense accounts to products.

    sed on standard prices of materials and labor

    ost at the rate of 300% (Based on the assumption


    4. Develop and diagram an Activity Based cost model using the information in the case Provide your best estimates about the cost and profitability of Wilkerson’s t
    does your cost assignment have on operated product costs and profitability? What causes any shifts in cost and profitability?

    As overhead costs are not in proportion with the volume of production output the cost systemWilkerson is using at the moment is an in
    wrong assumptionswhen analyzing profitability and therefore leads to wrong pricing decisions and ineffectivecost management.

    Activity based costing helps to find the real relationship between thevolume of production of a product and the overhead. In a first step
    and find the drivers of those costs. In Wilkerson’s case the different pools would be machine related expenses, set up labor, receiving an
    andshipping and engineering.

    The related cost drivers are machine hours, production runs, hoursof engineering work and number of shipments.

    Cost Activity Amount Cost Driver Quamtity Cost driver rate


    Machine Related Exp. 336000 Machine hrs 11200 30
    Setup Labor 40000 Production runs 160 250
    R&P Control 180000 Production runs 160 1125
    Enfineering 100000 Hrs of Engineering work 1250 80
    Packaging 150000 No of Shipments 300 500

    Product Valves Pumps Flow Controllers Total


    Pruductuion Units 7500 12500 4000 24000
    Direct Labor Costs 75000 156250 40000 271250
    Direct msterial 120000 250000 88000 458000
    Machine Related Exp. 112500 187500 36000 336000
    Setup Labor 2500 12500 25000 40000
    R&P Control 11250 56250 112500 180000
    Enfineering 20000 30000 50000 100000
    Packaging 5000 35000 110000 150000
    Total cost 13750 68750 0 1535250
    Cost per unit 1.8333333333 5.5 0 63.96875
    Actual Selling Price 86 87 105
    Actual margin 98% 94% 100%
    nd profitability of Wilkerson’s three product lines. What difference
    ifts in cost and profitability?

    is using at the moment is an inappropriate method that leads to


    ctivecost management.

    nd the overhead. In a first step it is necessary to definecost pools


    nses, set up labor, receiving and production control, packaging

    ipments.
    5. Based on your analysis for Question 4, what actions might Wilkerson’s management team consider improving the
    company’s profitability?

    5.The first thing to take care of is the Flow Controllers, as the Wilkerson's management teamcan take advantage of the
    favorable competitive situation in this market which is the inelastic in demand and the lack of competition, and
    therefore raise their price up to the range between116-177.5, depends on the market reaction (even if the previous
    10% price raise didn'tdamaged the sales, a 50% raise may damage them).

    Also the management team can compete in the price competition on the valves and pumps tomaintain and maybe
    increase their market share , although an exam should be made in order to check if the price decrease will harm
    the profit.
    6. What concerns, if any, do you have with the cost estimates you prepared in the answer to Question4? What other information or analysis would you want for bett
    profitability estimates?

    The cost calculations in question 4 are sensitive to the utilization of the product line.

    We based our numbers on the information of March 2000, which is mentioned as a typical month, but it is also mentioned that on months of high demand
    machines worked 12,000 hours,factory handled 180 production runs and 400 shipments.

    The cost calculations would be best achieved if we based it on past years demands charts which include seasonal shifts in demands.The cost of the resources
    and labor can also change during time and should be updated for accurate cost calculation
    nalysis would you want for better cost and

    months of high demand

    s.The cost of the resources


    7. Wilkerson has been compensating salespersons with commissions on their gross sales volumes(less returns).Parker wonders whether the company
    should change this incentive system.

    The current salespersons incentive system, based on volumes only, drives the salespersons tomaximize their sales
    regardless Wilkerson's profit.
    There are 2 main problems-1. The salespersons will want to sell for the lowest price they can, in order to increase
    their sales volume.2. If the Company has several product lines, the salespersons do not necessarily have theincentive to
    sell the most profitable products, but only the products generating maximalvolumes.I

    recommend on changing the incentive system to compensation on the profit generated fromeach sale, based on the
    known values of cost of each product using Activity-Based Costs.

    In this way the interests are similar and the salespersons will gain more when the company will profit mor
    nders whether the company

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