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:
...3.0 Variance Analysis
3.1 Flexible-Budget Variance Analysis
In Barnes Scuba Diving case, the main comparison for the flexible-budget variance analysis would be between the actual results and flexible budget. Static budget would not be useful for this comparison due to the different sales unit output which may result in a misleading and inaccurate result comparison.
With reference to the Flexible Budget Section attached in Annex X, Flexible-Budget Variance for Revenues was identified to be a favourable variance of $50,400 due to the fact that there was an increase of 216 participants on top of the budgeted 1800 participants and also an additional increased in course fee of $25 on top of the budgeted $350(selling price per unit). This favourable variance was also supported with the calculation of the selling price variance.
A closer look at the variance components reveals some major deviations from plan. Contradictory to the favourable variance for Sales Revenue, the overall contribution margin (-$9057) and operating profit (-$12,057) reflected unfavourable variances instead. These unfavourable variances were caused by the more than required variable resources being consumed with Barnes bearing responsibility for all unforeseen situations that happened and absorbing the additional costs incurred. Actual variable costs increased from $218 to $247.50, causing an unfavourable...
...If Wilkerson were to cut prices, based on contribution margin, to just cover short-term variable costs, what consequences could it experience? (5 marks)
Several break-even-point assumptions are made in calculation:
1) Total fixed costs do not change with volume, and will exist regardless if the products are sold or not.
2) Sales mix will be constant.
The contribution-margin percentage is 66.1%, which means 66.1 percent of each sales dollar is available for covering fixed costs and making income: $1,365,650/66.1%=$2,065,387 sales are needed to break even.
Based on the existing sales mix and production units given (Valves 7,500, Pumps 12,500 and Flow Controllers 4,000), the break-even prices in dollars (BEP$) are shown as below:
Therefore, based on the data above, if the company cut its prices to just cover short-term variable costs, the company’s total sales would fall by 4.05%, from $2,152,500 to $2,065,387, which would also result in 4.05% drop in the selling price of each unit of products, total variable costs at $699,737, and zero operating income before tax.
2. (a) How does Wilkerson's existing cost system operate? (5 marks)
Wilkerson's current cost system is based on a simple costaccounting system. Material cost is recorded as prices paid to the suppliers for components. Labour...
...1/ Variable Costs: The variable cost will be 40% higher [ an increase of 21,000 - 15,000=6,000 units]
Direct Material used 1,060,000 Variable Costs:
Direct Labor 1,904,000 Direct material used [ 1,060,000 *1.4] 1,484,000 Unit costs [ 6,335,600 / 21,000] =$ 301.7
Indirect Materials and supplies 247,000 Direct Labor [ 1,904,000 * 1.4] 2,665,600 Variable Cost/ Unit = 228.27 at both 15k & 21k units
Power to run plant eqip 213,000 Indirect Materials and supplies [247,000 * 1.4] 345,800 Total Variable Cost @ 15k units =
Fixed Cost: Power to run plant eqip [ 213,000 *1.4] 298,200 1,060,000+1,904,000 + 247,000+ 213,000 = 3,424,000
Supervisory salaries 926,000 Total Variable Cost 4,793,600 Unit Variable Cost = 3,424,000/15k units or
Plant Utilities 281,000 Fixed Costs: 4,793,600/21k units = $228.27/unit
Depreciation on P&P(S-L, time basic) 141,000 Supervisory salaries 926,000
Property tax on building 194,000 Plant Utilities 281,000
Required: Unit Variable Cost and total fixed costs Depreciation on P&P(S-L, time basic) 141,000
are expected to remain unchanged next month. Property tax on building 194,000
Calculate unit cost and total cost if...
Sample Test Materials
Select only one answer for each question.
1. At what point does depreciation on equipment used to produce a table become an expense?
a. At the end of the period when the depreciation is recorded
b. When the table is started
c. When the table is completed
d. When the table is sold
2. Which of the following describes an opportunity cost?
a. The largest net benefit given up by choosing one action that precludes taking other actions.
b. The costs associated with taking advantage of a business opportunity.
c. The costs that appear in the cost of goods sold section of the income statement.
d. The revenues that a company will earn when it takes advantage of a business opportunity.
3. Managerial accounting differs from financial accounting in that financial accounting is
a. More oriented toward the future
b. Concerned with nonquantitative information
c. Heavily involved with decision analysis and implementation of decisions
d. Primarily concerned with external financial reporting
4. A cost that remains unchanged on a per unit basis in a given time period despite changes in the level of activity should be considered
a. A variable cost
b. A fixed cost
c. An overhead cost
d. A relevant...
ADDITIONAL ASPECTS OF PRODUCT COSTING SYSTEMS
Changes from Tenth Edition
Chapter 18 was modified to include discussions of customer-related and business-related cost drivers and recent evidence about the usage and success of activity-based cost systems.
Our treatment of job costing and process costing is as brief as we can make it and still get the general points across. Students do need to understand the general idea of thesecost accumulation procedures; otherwise they are unable to visualize how costs are actually collected. The details, however, are appropriately left for an advanced course. The principal pedagogical problem here is how to get across the idea of equivalent production in process costing. Some introductory texts omit this idea, but this strikes us as dangerous because some student is almost sure to ask what happens in a process cost system if not all the units are completed by the end of the period. If the answer is not in the text, the instructor either has to duck the question, or attempt the difficult task of explaining it on the spot. In the text and in most problems, we assume that units are 50 percent completed as to labor and overhead. Since this assumption is widely used in practice, we see no point in complicating the text by introducing other percentages.
Certainly, the most difficult part of this chapter is the section on...
...The purpose of this report is discussing the case of WilkersonCompany that confronting tough competition in price cutting in pumps which caused to a big drop of pre-tax operating income from 10% to 3%. After observing the existing costing allocation, we found out there is an issue on the existing costing report that the manager could not be able to see the real situation. In light of this, there will be brought to the discussion on the feasibility of using an alternative costing method – Activity based costing (ABC) in the latter paragraphs.
The issue of misallocation cost
With the use of Traditional Absorption Costing (TAC) which means WilkersonCompany is now only put the costing of direct labor and material in place. As we can see the table 1 below, the percentage of total direct cost allocation in Valves, Pumps and Flow Controllers are 46%, 46% and 52% respectively, and so for the manufacturing overhead are 54%, 54% and 48%.
Table 1: Traditional Absorption Costing
Valves ($) Pumps ($) Flow Controllers ($)
Direct Labor 75,000 18% 156,250 18% 40,000 16%
Direct Material 120,000 29% 250,000 29% 88,000 35%
Total Direct Costs 195,000 46% 406,250 46% 128,000 52%
Manufacturing Overheads 225,000 54% 468,750 54% 120,000 48%
Total Cost Allocation 420,000 100% 875,000 100% 248,000 100%
Now if we go...
...1. The WilkersonCompany is in the business of manufacturing valves, pumps and flow controllers. The company has been experiencing profit losses due to price reductions as a result of heavy competition in the pump category, which is considered a commodity product. In the valves category, Wilkerson seems to be a market leader with a loyal customer base. The valve business is less competitive, with no price reductions, and therefore thecompany has maintained its gross margin target while not compromising market share. Similarly to the valve business, the flow controller category is not as competitive as the pump industry, hence Wilkerson's ability to increase price by 10% without sacrificing volume. In addition, the company needs to take into consideration its increase in indirect expenses relatively to the direct labor expenses. All in all, the company has seen its pre-tax margin decrease from 10% to 3%.
2. Adopting a periodic expense approach will severe the already current problems with Wilkerson's cost system by distorting even more the actual cost picture. The reason is that the periodic method would ignore the company's product mix as each of the 3 categories has a differentiated direct cost structure. This would therefore create an even more incorrect analysis of the company's profit structure. Although the...