Managerial Accounting E3 Group
1 WILKERSON CASE 1. How does Wilkerson’s existing cost system operate? Simple cost accounting system (One-? cost pool) Product costs: direct labor, direct materials, manufacturing overhead. The overhead costs were allocated to products as a percentage of production-? run direct labor cost with a rate of 300%.
2. Develop an activity-? based cost model using the information in the case. Provide best estimate 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 ny shifts in cost and profitability? Product Lines Direct labor cost Direct material cost Manufacturing overhead Machine-? related e xpenses Setup l abor Receiving & production control Enginnering Packaging & shipping Total manufacturing overhead Unit manufacturing overhead Standard unit costs Original cost accounting system Valves Pumps Flow Controllers $10 $16 $12. 50 $20 $10 $22 $112,500 $2,500 $11,250 $20,000 $5,000 $151,250 $20. 17 $46. 17 $56. 00 $187,500 $12,500 $56,250 $30,000 $35,000 $321,250 $25. 70 $58. 20 $70. 00 $36,000 $25,000 $112,500 $50,000 $110,000 $333,500 $83. 38 $115. 38 $62. 00 Target elling price Planned gross margin % $71. 03 35% $89. 54 35% $177. 50 35% Actual selling price Actual gross margin % Original cost accounting system $86 46% 34. 90% $87 33% 19. 50% $105 -? 10% 41. 00% The costs of flow controllers largely increase while its margin becomes negative. As expected for customized products, flow controllers are more costly, requiring more production runs, shipments and engineering labor than valves and pumps. 3. Based on your analysis for Question 2, recommend three distinct actions that Wilkerson’s managers could implement to improve the company’s profitability. 1) Unless the price an be increased, the company should stop producing Flow Controllers since the margin is -? 10%. Interestingly, there is little competition for this product and their last price increase did not have apparent effect on demand. If possible, managers could also contemplate reducing the cost of Flow Controllers in order to better the margin.
2) Valves are overcosted and overpriced. Since its margin is higher than planned, the firm could cut its price when taking competitors’ prices into consideration in order to gain more market share from competitors. 3) According to our analysis, Pumps appear to be appropriately riced in order to attain the target product return of 35%. Hence, unless cost reductions are possible without affecting the quality, our recommendation is not to make any changes to this product line. Nikhil Prakash; Lydia Yang; Magnus Proesch; Rafaa Bach Hamba; Leonardo Oliveira; Alexis Labrecque Managerial Accounting E3 Group 1
4. What concerns, if any, do any have with the cost estimates you prepared in the answer to Question 2? What other information or analysis would you want for better cost and profitability estimates? (1) Subdividing the single manufacturing overhead cost pool into 5 smaller cost pools elated to different activities increases the chances of misidentifying the costs of different activity cost pools. And even though improvements in information technology have reduced the costs to gather, validate, store and analyze vast quantities of data, the measurements are still costly. (2) More level cost details on the shipment could be useful, since the number of shipments alone is insufficient. The cost of shipping per product varies according to the number of products per delivery, distance, weight, packaging, etc. (3) Depreciation impact on the machine of the different products. Everything else onstant, some products may depreciate the machines faster than others. (4) More information on the cost of receiving, unpacking and storing the different direct material products that are used for valves, pumps, and flow controllers.
With more information on the qualitative work performed in the receiving and production, we could have a more detailed measure of cost consumption and appropriate cost distribution for quality control for expensive and inexpensive items. Additionally, we should potentially vary the time spent and the costs related to controlling expensive components compared to inexpensive ones.