Wilkerson has always been a competitive force in the pump manufacturing industry, but lately their profits have dropped to an unacceptable level. The drop in profits has forced management to take a look at several possible solutions, including their accounting methods. Historically, Wilkerson has relied on the traditional costing method of accounting meaning that they have allocated overhead as a percentage of the labor hour costs to each of the three products. The overhead costs are currently set at 300% of the production-run direct labor costs which is allocating three times the labor rate figures to overhead, per product line. In doing so, the overhead costs that should be applied to the flow controllers are really being allocated to the other two product lines.

I would suggest using the Activity Based Costing (ABC) method of accounting to create a more realistic connection between the volume of production for each product with the cost of overhead and labor associated with each unit. Wilkerson stated five activities that fall under overhead: engineering costs, receiving and production costs, setup labor costs, packing and shipping costs and machine usage costs. By using the ABC model, Wilkerson is able to split the total manufacturing overhead based on utilization of each of these resources per item manufactured providing a realistic cost per unit figure.

Based on the numbers that were derived by using the ABC model, I would recommend the following actions be taken by Wilkerson. First, because Wilkerson offers a variety of levels of Flow Controllers based on the customer’s needs, they should set multiple price points based on the customization. Because each customized flow controller order has a different level of labor and material associated with it, it would be beneficial to allocate overhead to each different type of controller in order to cover the