Wilkerson Company

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Name: Nkechinyere Jennifer Okereke

Assignment: Wilkerson Company

April 3rd

Brief background: Wilkerson Company1 is a manufacturer of valves, pumps and flow controllers.  In the past Wilkerson has enjoyed a 10% pre-tax margin on all it products.  In recent months the pre-tax profits has dropped below 3% (See Exhibit 1).  It is possible that the allocation of cost might not have been as precise as it could be and that alternative allocation methods might reveal areas for management attention.

Question 1:  To estimate using activity based costing (ABC) we would first have to assign cost, to cost pools. 2 These pools have been identified in Exhibit 1 and in the table below.  The ABC allocation method uses cost drivers to allocate the cost for each product.

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The estimated product cost for valves, pump and flow controllers using the ABC is shown in (exhibit 2) using the cost driver in the table above.  The values are calculates by using the formula (Machine related expense/Total monthly machine hours) * Value allocation for machine hours.  Total Allocation= (336000/11,200)*3750=$112500.00 Therefore Unit Cost =112500.7500.  This is done for all the overhead expense. Using this method the Cost for the valve, pump and flow controllers are $46.17, $58.20 and $115.38 respectively.

Question 4:  See ABC and standard unit cost comparison table in exhibit 3.  The difference in the values is caused by the allocation of cost.  Using the standard costing method costs have been allocated based on direct labor cost at 300%. Allocation was not based on whether or not valves and flow controllers utilized equal amount of resources even though in the standard cost method their unit manufacturing overhead cost is considered equal.  In exhibit 3 receiving and shipment are the differentiators between the much higher activity cost and the lower standard cost for flow controllers. At Wilkerson receiving cost is driven by the ordering, processing, inspection and movement of components, flow controller has twice as many components as the pump or valve so it stands to reason that the bulk of the receiving cost should have been allocated to this product.  Another area is the shipment cost.  Flow controllers have much more variety in the industry and this generates a significant number of additional shipments when compared to the valve or pump.  In the standard cost model the valve and pump were carry some of the cost that should have been allocated to the flow controller