Wilkerson Company Case
1. What is the competitive situation faced by Wilkerson?
The competitive situation faced by Wilkerson is quite severe. Price cutting in its main product has led to a huge drop in profit. While price increase in another product line partially made up the loss. We will discuss the detailed situation line by line. (1) Valves
It was the first product line developed by Wilkerson and its high quality brought it a loyal customer base. Even if several competitors could match Wilkerson’s quality in valves, none had tried to gain market share by cutting price. Therefore the competitive situation for valves was not so fierce that Wilkerson could maintain its gross margin. (2) Pumps
Pump product line’s characteristic is high-volume and the manufacturing process for pumps was practically identical to that for valves. Due to the severe competitive situation for pumps, its market price has reduced continuously, so that Wilkerson had to match the low price to maintain its market share and sales volume. (3) Flow controllers
The biggest characteristic of flow controllers is customized, so that they required more components and more labor than the other two products, as well as more production runs and shipments. Due to variety of product and competitors’ overlooking, the price rise did not have apparent effect on demand.
2. Given some of the apparent problems with Wilkerson’s cot 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? Given Wilkerson’s current situation, we consider that executives should not abandon overhead assignment to products entirely by adopting a contribution margin approach. Two conspicuous reasons are listed below. First of all, the biggest problem faced by Wilkerson’s executives was to figure out the profitability of each product line. Therefore, they must try to allocate overhead to each product line as detailed as possible, which means that treating the entire overhead as a period expense was not a sagacious decision. Moreover, the main advantage of variable costing system is to prevent executives from overproducing, which is not applicable for Wilkerson because of its just-in-time producing system. All in all, it is not a good choice for Wilkerson to abandon overhead assignment to products entirely by adopting a contribution margin approach in which manufacturing overhead is treated as a period expense.
3. How does Wilkerson’s existing cost system operate? Develop a diagram to show how costs flow from factory expense accounts to products.
Packaging and shipping
Packaging and shipping
Wilkerson’s existing cost system operates as the following diagram. Receiving and production control
Receiving and production control
300% x Direct Labour Cost
300% x Direct Labour Cost
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 three product lines. What difference does your cost assignment have on reported product costs and profitability? What causes any shifts in cost and profitability? (1) Activity-based cost model operates as the following diagram.
CONCEPT OF COST:
A SACRIFICE OR GIVING UP OF RESOURCES FOR A PARTICULAR PURPOSE FREQUENTLY MEASURED BY THE MONETARY UNITS (RUPEES, DOLLARS) THAT MUST BE PAID FOR GOODS AND SERVICES .
➢ EMPHASIS ON COST INFORMATION:
MANAGEMENT ACCOUNTANTS PAY A LOT OF ATTENTION TO COSTS BECAUSE COST HAVE A VITAL ROLE TO PLAY IN PLANNING, EVALUATING AND DECISION MAKING. FOR
EXAMPLE IN PLANNING THE ROUTE AND FLIGHT SCHEDULES THE MANAGER OF AN AIR LINE MUST CONSIDER AIR CRAFT FUEL COST, SALARIES OF FLIGHT CREWS, AND COST OF LANDING ETC.
➢ CLASSIFICATION OF COST:
BEFORE MANAGEMENT ACCOUNTANTS CAN CLASSIFY COST THEY NEED TO CONSIDER HOW MANAGERS WILL USE THE INFORMATION. DIFFERENT COST CONCEPTS AND CLASSIFICATIONS ARE USED FOR DIFFERENT PURPOSE, SOME ARE USED FOR PLANNING AND CONTROL AND OTHER ARE RELEVANT FOR COSTING PRODUCTS AND REPORTING RESULTS. THE SAME COST CAN BE CLASSIFIED IN NUMBER OF WAYS DEPENDS ON INTENDED USE OF THE COST INFORMATION.
➢ COMMON COST CLASSIFICATIONS IN MANAGERIAL ACCOUNTING
THE FOLLOWING ARE SOME BASIS ON WHICH COST CAN BE CLASSIFIED INTO VARIOUS TYPES
1. MANUFACTURING (PRODUCT COST)
2. NON MANUFACTURING(PERIOD COST)
...on demand. Wilkerson had always used a simple cost accounting system. Each unit of product was charged for direct material and labor cost. Material cost was based on the prices paid for components under annual purchasing agreements. Labor rates, including fringe benefits, were $25 per hour, and were charged to products based on the standard run times for each product (see Exhibit 3). The company had only one producing department, in which components were both machined and assembled into finished products. The overhead costs in this department were allocated to products as a percentage of production-run direct labor cost. Currently, the rate was 300%. Since direct labor cost had to be recorded anyway to prepare factory payroll, this was an inexpensive way to allocate overhead costs to products. Knight noted that some companies didn’t allocate any overhead costs to products, treating them as period, not product, expenses. For these companies, product profitability was measured at the contribution margin level ! price less all variablecosts. Wilkerson’s variablecosts were only its direct material and direct labor costs. On that basis, all products, including pumps, would be generating substantial contribution to overhead and profits. She thought that perhaps some of Wilkerson’s competitors were...
TYPES OF COSTS IN ACCOUNTING
Cost is a sacrifice of resources to obtain a benefit or any other resource. For example in production of a car, we sacrifice material, electricity, the value of machine's life (depreciation), and labor wages etc.
Costs are usually classified as follows:
Product cost - Product costs are costs assigned to the manufacture of products and recognized for financial reporting when sold. They include direct materials, direct labor, factory wages, factory depreciation, etc.
Period cost - all costs other than product costs. They include marketing costs and administrative costs, etc.
Fixed cost - Fixed costs are costs which remain constant within a certain level of output or sales. This certain limit where fixed costs remain constant regardless of the level of activity is called relevant range. Example - depreciation on fixed assets.
Variablecost - Variablecosts are costs which change with a change in the level of activity. Examples include direct materials, direct labor, etc.
Semi Variablecost – these costs are partly fixed and partly variable. Example – telephone rent. It includes partly fixed charge up to...
Following points must be taken into consideration before fixing the price of a product.
Elements of Marketing Mix etc.
However, major determinants of price are - Costs, competition and demand. Based on this there are three major approaches to setting the price of a product. They are:
1. Cost oriented pricing
2. Competition oriented pricing
3. Demand oriented pricingCost oriented pricing
In Cost oriented approach to pricing or cost based pricing the selling price of a product is determined by adding a percentage of profit to the product cost. There are two methods in cost oriented pricing. They are
1. Cost plus pricing and
2. Target profit pricing or break-even analysis.
Cost plus Pricing
Selling price of a product is calculated by aggregating all the costs of the product such as manufacturing cost, marketing cost and distribution cost plus a predetermined margin of profit. Giving below an example of cost plus pricing:
Particulars Amount $
Manufacturing Cost 60
Administration cost 6
Distribution Cost 6
Promotional and selling cost 8
Total Costs 80
Profit margin 10
...reasons for the companies to implement variable pay plan are: motivating employees and reducing cost. In this paper we try to point out the challenges the organizations might face when they apply variable pay system by reviewing related literature. We find that it is difficult for the company to have a reliable measure for the variable pay system. In addition, the focus of the variable pay plan should be on motivating employees or cutting cost and how to strike a balance between these two is also an essential issue. Finally we conclude that we always have to assess the circumstances of the organization before applying the plan.
Variable Pay Plan 3
Variable Pay Plan: One Way to Motivate Employees and Cut Cost.
The companies which try to implement the variable pay system are increasing. More and more American employees who in the past are used to receive fixed pay with annual raises now work under pay systems with uncertain elements. (William M. Mercer Inc., 1999). Kristine and Mark's study (2002) showed that even though the predicted values of the variable pay plan were lower than the offered fixed pay, generally most of the employees would choose the variable pay as long as it was linked to individual performance. Like Paul (2007) said in his article, the employees who perform better want to know...
...TCO B Questions
1. (TCO C) The following overhead data are for a department of a large company.
Actual costs Static
Activity level (in units) 800 750
Indirect materials $6,850 $6,600
Electricity $1,312 $1,275
Administration $3,570 $3,700
Rent $3,320 $3,200
Required: Construct a flexible budget performance report that would be useful in assessing how well costs were controlled in this department.
(Points : 30)
2. (TCO D) Mr. Earl Pearl, Accountant for Margie Knall, Inc. has prepared the following product-line income data:
Total A B C
Cost Volume Profit Analysis
According to Jon Scheumann “a successful organizations need a culture that is attuned to cost management and pay attention to cost structure”
From that statement manager must pay attention and carefully thinking when do decision making to the cost. For example when manager want to target the profit. They must take every cost that related in production such asvariablecost and fix costs.
Cost Volume profit analysis is used in decisions making in a company. The reasons why used cost volume profit analysis as a method to make decisions making because it helps manager to estimate future cost, revenue, expenses and profit that helps them to monitor the level of activity in production and monitor the plan. Besides that when used CVP analysis we can identify monitor the activity level and make analysis to avoid loss, find a target profit and maximize the production of unit. Moreover CVP analysis can help manager to identify the risk and effect for their decision making and a technique to analyse the profit change bases on sales volumes, costs, and process.
When do CVP analysis the manager can get the information like
the product that want to analyse
the volume is required to achieve a certain level of profit
total of revenue is needed before the...