IIM,INDORE

Wilkerson Company
MAC-2
Group 12 1/11/2012 Jagadeesh Putta, Mayur Macharla, Sarva Harish, Gali Stephen Stanley

The cost pools and corresponding cost drivers are as follows: COST POOLS Machine-related expenses Setup labor cost Receiving and production control Engineering Packaging and shipment COST DRIVERS Machine hours Number of production runs Number of production runs Hours of engineering work Number of shipments

Machine Related Expenses For Machine hours 11,200

$336,000 $30/machinehour

Setup Labor For Production runs 160

$40,000 $250 / run

Receiving and Production Control For Production runs 160

$180,000 $1,125 / run

Engineering Hours of engineering work 1,250

$100,000 $80 / hour

Packaging and Shipment Number of shipments 300

$150,000 $500 / shipment

Existing cost system:- Currently Wilkerson implements volume-based full costing. Direct materials and labor costs are based on standard prices of materials and labor rates. Indirect cost (overhead) is allocated to cost objects (products) in proportion to direct labor cost at the rate of 300%.

VALVES PUMPS FLOW CONTROLLERS

machine Receiving and Packaging direct direct related Setup production and total per material labor expenses labor control Engineering shipping unit $16.00 $10.00 $15.00 $0.33 $1.50 $2.67 $0.67 $46.17 $20.00 $12.50 $15.00 $1.00 $4.50 $2.40 $2.80 $58.20

$22.00

$10.00

$9.00

$6.25

$28.13

$12.50

$27.50

$115.38

Table: ABC costing for assigning variables

Profitability analysis: volume based costing valves Standard unit costs Target selling price Planned gross margin (%) Actual selling price Actual gross margin (%) $56.00 $86.15 35% $86.00 34.90% pumps $70.00 $107.69 35% $87.00 19.50% flow controllers $62.00 $95.38 35% $105.00 41.00% valves $46.17 ABC costing flow pumps controllers $58.20 $115.38 $95.38 35% $105.00 -9.88%

$86.15 $107.69 35% $86.00 46.32% 35% $87.00 33.10%

Conclusions: Wilkerson can continue to decrease prices of commodity products (valves and pumps) since their margins are quite high, but need to react to negative profitability of flow controllers. Limitations of analysis is that our calculation of cost drivers and product cost doesnt allow revealing the difference between individual flow controllers, although we know that they are customized.

We recommend to move from traditional volume-based costing to activity-based costing because of the fact that high overheads were not showing the real picture regarding the cost of flow controllers. Having in mind the absence of price competition, customized nature of a product Wilkerson can change prices of individual flow controllers in order to secure healthy profit margin. Based on the ABC method of costing we conclude that Wilkerson can afford to decrease prices of pumps and valves to tackle price wars with competition and stop production of flow controllers.