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Admins Assistant

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Wilkerson Company’s business is manufacturing of valves, pumps and flow controllers. Due to a high competition on the market the company had to lower the prices. The pre-tax margin dropped to less than 3% and gross margin fell below 30%.

The company is using simple cost accounting system that cannot provide correct analyses of the company’s profit structure. With this system direct material and labor costs are standard prices. Overheads are charged as 300% of the direct labor cost and is applied to the total costs pool. The system the company is using is inappropriate and leads to wrong assumptions in terms of profitability and price decisions, as well as ineffective cost management.

The company needs to use Activity Based Costing to find a relationship between the volume of product producing and the overhead. For this method, we need to categorize costs pool and their costs in separate categories.
To apply Activity Based Costing to this case we need to compute the cost per hour. It is very important for the manager to have this information.
We can make the following computations to find a cost per hour: Cost pool | Amount | Amount | ABC rate | Machine expenses | $336,000 | 11,200 hrs | $30 per hr | Setup labor | $40,000 | 150 runs | $250 per run | R&P control | $180,000 | 160 runs | $1,225 per run | Enginneering | $100,000 | 1,250 hrs | $80 Hrs | P&S | $150,000 | 300 shipments | $500 per shipment |

ABC calculation per product Product | Valves | Pumps | Flow Controllers | Units | 7500 | 12500 | 4000 | Direct Labor | 75,000 | 156,250 | 40,000 | Direct Material | 120,000 | 250,000 | 88,000 | Total Direct Costs | 195,000 | 406,250 | 128,000 | Machine expenses | 112,500 | 187,500 | 36,000 | Setup labor | 2,500 | 12,500 | 25,000 | R&P control | 11,250 | 56,200 | 112,500 | Engineering | 20,000 | 30,000 | 50,000 |

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