1

Wilkerson is a manufacturer of pumps, flow controller and valves. It has remained as the qua
that isnow being challenged by the increasing competition. The company follows just in tim
comeptition pushed Wilkerson to analyse its overhead cost. Product wise situion of Wilkerson
1.Pumps are commodity product produced in high volume. High competiti
decline in pre-tax margins fall below 3% while the gross margin fell below 20%.
2. Flow controllers are customised product sold in less com
demand 3. Valves are standard product produced in large
mantained at 35%.

Wilkerson had always used a simple cost accounting system. Each unit of product was charged
charged to products based on the standard run times for each product. The company had only
as a percentage of production-run direct labor cost. Since direct labor cost had to be recorded

3 Cost pool amount cost driver

Machine related rate 336,000 machine hours
setup labour 40,000 production runs
receiving and production control 180,000 production runs
Engineering 100,000 hrs of engineering work
Packaging and Shipping 150,000 no. of shipments

Valves Pumps
Units 7,500 12500
Direct Labour 75,000 156250
Direct Material 120,000 250000
Manufacturing Overheads
-Machine related expense 112,500 187500
-Setup labour 2500 12500
-Receiving and production control 11250 56250
-Engineering 20000 30000
-Packaging and Shippping 5000 35000
Total Manufacturing Overhead 151,250 321250
Total Costing 346,250 727,500

4
Flow Controllers will be most affected by this as price per unit of flow controllers will now be lower
controllers. Indicating that Wilerson company would be bearing a loss on the sale of fl
 Valves Pumps
Cost per unit 46.17 58.20
Target selling price 86 87

The capacity based must be used for allocation is preffered over actual production levels, sin
estimate of th

6 Valves Pumps
Units 7,500 12500
Direct Labour 75,000 156250
Direct Material 120,000 250000
Manufacturing Overheads
-Machine related expense 112,500 187500
-Setup labour 2500 12500
-Receiving and production control 11250 56250
-Engineering 20000 30000
-Packaging and Shippping 5000 35000
Total Manufacturing Overhead 151,250 321250
Total Costing 346,250 727,500

Unit Production Cost at actual production level

Valves Pumps
Direct Labour 10 12.5
Direct Material 16 20
Manufacturing Overheads
-Machine related expense 15 15
-Setup labour 0.333333333 1
-Receiving and production control 1.5 4.5
-Engineering 2.666666667 2.4
-Packaging and Shippping 0.666666667 2.8
ABC Manufacturing overheads 20.16666667 25.7
Total Cost 46.16666667 58.2
 7 Cost pool amount cost driver
Machine related rate 336,000 machine hours
setup labour 40,000 production runs
receiving and production control 180,000 production runs
Engineering 100,000 hrs of engineering work
Packaging and Shipping 150,000 no. of shipments

Valves Pumps
Direct Labour 75,000 156250
Direct Material 120,000 250000
Manufacturing Overheads
-Machine related expense 105000 175000
-Setup labour 2222.2 11111
-Receiving and production control 2222.2 15555.4
-Engineering 20000 30000
-Packaging and Shippping 3750 26250
ABC Manufacturing overheads 133194.4 257916.4
Total Cost 328,194 664,166

8
Major highlights from ABC product cost and profit calculation
1.Valves are highly profitable
2. Pumps are about normal profitability
3. Flow controllersa previously most profitable are just
break even under capacity costing

9
Cost shift have occurred because: -
1. Valves are high volume product and require little production
and engineering support
2. flow controllers consume lots of production and
engineering support resources per unit produced

10 Given the low level of profitability , it would be advisable for Wilkerson to r

11
Even if some combinations is taken, there would no change in the spending as there has been
the basis of cost allocation.
 Even if some combinations is taken, there would no change in the spending as there has been
the basis of cost allocation.

12
The limitations of the analysis are: -
1.ABC analysis are often biased, expensive and subjective due to managem
2. ABC analyiss ignores admin expenses.
3. Except enginerering and machine hours,
production-run, each reciept and shipment require same resource. These activites could ha
different products
es. It has remained as the quality leader in the market but
he company follows just in time delivery and increasing
uct wise situion of Wilkerson is: -
n high volume. High competition in the market has led to
ell below 20%.
mised product sold in less competitive market with inelastic
rd product produced in large lots with gross margin being
t 35%.

unit of product was charged for direct material and labor cost. Material cost was based on the prices paid for compon
oduct. The company had only one producing department, in which components were both machined and assembled i
abor cost had to be recorded anyway to prepare factory payroll, this was an inexpensive way to allocate overhead cost

amount ABC rate

11200 machine hours 33600/11200 = $30 per machine hour
160 production runs 40000/160 = $ 250 per production run
160 production runs 180,000/160 = 1125 per production run
1250 engineering hours 100,000/1250 = $80 per engineering hour
300 shipmnets 150,000/300 = $500 per shipment

Flow Controllers
4000
40000
88000

36000
25000
112500
50000
110000
333500
461,500

w controllers will now be lower than the per unit cost of flow
be bearing a loss on the sale of flow controllers
 Flow Controllers
115.38
105

r actual production levels, since projected sales each year would fluctuate however the capacity would be constant th
estimate of the profitability scenario of Wilkerson.

Flow Controllers
4000
40000
88000

36000
25000
112500
50000
110000
333500
461,500

Flow Controllers
10
22

9
6.25
28.125
12.5
27.5
83.375
115.375
 amount ABC rate
12000 machine hours 33600/11200 = $28 per machine hour
160 production runs 40000/180 = $ 222.22 per production run
160 production runs 180,000/180 = 1000 per production run
1250 engineering hours 100,000/1250 = $80 per engineering hour
300 shipmnets 150,000/400 = $375 per shipment

Flow Controllers
40000
88000

33600
22222
48888.4
50000
82500
237210.4
365,210

be advisable for Wilkerson to relook their strategy of producing Flow Controllers

e spending as there has been changes only in

tion.
d subjective due to management and employee jusgement
ses.
inerering and machine hours, all are transactional. If setup,
ource. These activites could have difference duration for
oducts
n the prices paid for components under annual purchasing agreements. Labor rates were $25 per hour, and were
h machined and assembled into finished products. The overhead costs in this department were allocated to products
ay to allocate overhead costs to products.
pacity would be constant thereby giving us a consistent
ere $25 per hour, and were
ent were allocated to products