Wilkerson company is operating the mature market with limited opportunities for innovation and facing declining from 10% to 3%. Wilkerson is producing 3 different kind of products; each has the same production process but not the same quantity of components. The valves and pumps production are high volume and standard, the flow controllers are low volume and highly customized. The overhead costs are 3 times of direct labor costs. The pump is facing the price pressure, but the company even increased price for the flow controllers without losing sales.
The costing system that Wilkerson currently use is full costing system, which is not sufficient enough to support management decisions. ABC could reflect the realities of production more accurately, therefore the ABC costing system is suggested.
1. The differences between the full cost system and the ABC
The major differences relate to the two-stage allocation process. * In the first stage, traditional systems allocate indirect costs to cost centers , ABC to activities. * In the second stage, full costing systems use a limited number of volume-based allocation on basis of direct labour, machine hours or materials, whereas activity-based systems use many different types of volume-based and non-volume-based cause-and-effect second stage drivers.
2. Full costing system
The full costing system, which aims to allocate all costs to products through a sharing-out process based on volumes of inputs and outputs, that the cause-and-effect relationships are not of major importance. 2.1 Advantages of the full costing system
Full costing systems were suitable as below: * Direct costs were the main costs. * Indirect costs were relatively small. * Information costs were high. * Produce a limited range of products * Market competition was less intensive.
