Wilkerson Company
What is the competitive situation that Wilkerson is facing?
• Mature product markets
• Limited opportunities for innovation
• Declining profits
• Three product lines
• Valves and pumps are high volume commodity type products
̶ Facing increasing price pressure in market for pumps
• Flow controller are lower volume more customized and specialized. This product line
requires more engineering time and smaller production runs.
̶ Little or no apparent price pressure in market for controllers
How does the company’s existing cost system work?
Manufacturing Overhead Costs
Machine Costs Set-up Costs Receiving/Production Packaging/Shipping Engineering
Control Costs Costs Costs
$336 K $40K $180K $150K $100K
Production Overhead Cost
Pool/Center
$806K
300 % Direct
Labor $
Direct Materials $ Valves, Pumps,
Direct Labor $ Flow Controllers
What would an ABC system for Wilkerson look like?
Resource
Manufacturing Overhead Costs
Costs
Resource
Drivers
Machine Set-up Receiving/Scheduling Packaging & Engineering
Activities Components Machines Components Shipping
$336 K $40K $180K $150K $100K
Activity
Cost $/Machine $/Prod’n $/Prod’n $/Shipment $/Eng.
Drivers Hour Run Run Hour
Direct Materials Flow
Valves Pumps
Direct Labor Controllers
What would the ABC cost allocation rates be?
Activity Cost Driver Allocation Rate
Machine Components $336,000 11,200 machine hrs $30/machine hr
Set-up $40,000 160 production runs $250/run
Receiving/Scheduling $180,000 160 production runs $1,125/run
Packaging/Shipping $150,000 300 shipments $500/shipment
Engineering $100,000 1,250 engineering hrs $80/engineering hr
Using ABC what would the estimated costs of Wilkerson’s products be?
Valves Pumps Flow Controllers Total
Dr Materials $120,000 $250,000 $ 88,000 $458,000
Dr Labor 75,000 156,250 40,000 271,250
Overhead:
Machine 3,750 x 30 = 112,500 6,250 x 30 = 187,500 1,200 x 30 = 36,000 336,000
Set-up 10 x 250 = 2,500 50 x 250 = 12,500 100 x 250 = 25,000 40,000
Receiving & Prod’n Control 10 x 1,125 = 11,250 50 x 1,125 = 56,250 100 x 1,125 = 112,500 180,000
Packaging & Shipping 10 x 500 = 5,000 70 x 500 = 35,000 220 x 500 = 110,000 150,000
Engineering 250 x 80 = 20,000 375 x 80 = 30,000 625 x 80 = 50,000 100,000
Total ABC Overhead 151,250 321,250 333,500 806,000
Total Cost $346,250 $727,500 461,500 $1,535,250
Using ABC what would the cost per unit and the profit margin be?
Valves Pumps Flow Controllers
Production 7,500 12,500 4,000
Dr Materials $16.00 $20.00 $22.00
Dr Labor 10.00 12.50 10.00
Overhead:
Machine 15.00 15.00 9.00
Set-up 0.33 1.00 6.25
Receiving & Prod’n Control 1.50 4.50 28.13
Packaging & Shipping 0.67 2.80 27.50
Engineering 2.67 2.40 12.50
Total ABC Overhead 20.17 25.70 83.38
Total Cost 46.17 58.20 115.38
Selling Price (Actual) 86.00 87.00 105.00
Profit $39.83 $28.80 $(10.38)
Profit Margin 46.3% 33.1% -9.9%
What’s the difference between Wilkerson’s Traditional System and ABC System?
The difference between the two costing systems is with respect to the accounting for overhead costs.
Valves Pumps Flow Controllers
Traditional ABC Traditional ABC Traditional ABC
Dr Materials $16.00 $16.00 $20.00 $20.00 $22.00 $22.00
Dr Labor 10.00 10.00 12.50 12.50 10.00 10.00
Overhead:
@ 300% of DL$ 30.00 37.50 30.00
Machine 15.00 15.00 9.00
Set-up 0.33 1.00 6.25
Receiving & Prod’n Control 1.50 4.50 28.13
Packaging & Shipping 0.67 2.80 27.50
Engineering 2.67 2.40 12.50
Total Overhead 30.00 20.17 37.50 25.70 30.00 83.38
The traditional system And, undercosts
overcosts high low volume
volume products products
What’s the difference between Wilkerson’s Traditional System and ABC System?
Valves Pumps Flow Controllers
Traditional ABC Traditional ABC Traditional ABC
Dr Materials $16.00 $16.00 $20.00 $20.00 $22.00 $22.00
Dr Labor 10.00 10.00 12.50 12.50 10.00 10.00
Overhead:
@ 300% of DL$ 30.00 37.50 30.00
Machine 15.00 15.00 9.00
Set-up 0.33 1.00 6.25
Receiving & Prod’n Control 1.50 4.50 28.13
Packaging & Shipping 0.67 2.80 27.50
Engineering 2.67 2.40 12.50
Total Overhead 30.00 20.17 37.50 25.70 30.00 83.38
Total Cost 56.00 46.17 70.00 58.20 62.00 115.38
Selling Price (Actual) 86.00 87.00 105.00
Profit $30.00 $39.83 $17.50 $28.80 $43.00 $(10.38)
Profit Margin 34.9% 46.3% 19.5% 33.1% 41% -9.9%
Recommendations?
Pricing: Increase price of flow controllers.
Meet competitor pricing for valves and pumps.
Minimum order size: particularly with respect to flow controllers to reduce overhead costs
associated with small production runs and small shipments.
Improve operations: to reduce set up times, lower cost of receiving and materials handling, costs
of packaging and shipping and engineering support.
Improve design of products: particularly flow controllers. Redesign to use fewer parts, to share
parts with valve and pumps.
