...1. Provide your best estimate of the cost and profitability of Wilkerson’s three product lines using: a. Wilkerson’s existing cost system – Ø Valves – Cost: $56/unit, Gross Margin: $30/unit, Gross Margin %: 35% Ø Pumps – Cost: $70/unit, Gross Margin: $17/unit, Gross Margin %: 20% Ø Flow Controller – Cost: $62/unit, Gross Margin: $43/unit, Gross Margin %: 41% b. Activity-‐based cost model using the information in the case – Ø Valves – Cost: $46/unit, Gross Margin: $40/unit, Gross Margin %: 47% Ø Pumps – Cost: $58/unit, Gross Margin: $29/unit, Gross Margin %: 33% Ø Flow Controller – Cost: $115/unit, Gross Margin: $(10)/unit, Gross Margin %: (10)% 2. What causes any shifts in reported product costs and profitability? Compared to the existing cost system where overheads are allocated proportionally to direct labor cost (@300%), the new ABC cost system shifts some of the original overheads allocation...
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...ACCT5620W Contemporary Management Accounting Wilkerson Case Report * Contents Executive Summary 2 Competitive situation faced by Wilkerson 2 Wilkerson’s Existing Costing System Limitation & Possibility of Activity Based Costing 4 Cost Driver and rates under Activity-based Costing 6 Implication and Recommendations 8 Valves 8 Pumps 9 Flow controllers 9 Executive Summary Wilkerson traditional costing system seems to be too simplified. Using a single allocation base to allocate manufacturing overhead cost has understated the customized product (i.e. flow controller) cost while overstated the volume based produce (i.e. valves). Correct product cost can guide management a better strategic decision and better allocation of the company resources. We are going to analyze the difference between the traditional costing method and activity base costing and elaborate how the company management can react on it. Competitive situation faced by Wilkerson Wilkerson is a manufacturer of valves, pumps and flow controllers. Their target customers are manufacturers of water purification equipment. According to the case, the actual gross margin of flow controller; the most profitable production line, is 41%. It is the only production line outperforms the planned gross margin, which is 35%. Before studying the competitive situation, the followings are the descriptions of Wilkerson’s three products features, market situation and price setting. Valves Produced...
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...Management Accounting for Multinational Companies Solution to the Wilkerson Case Igor Baranov Executive Summary Taking into account the difference among product and high proportion of overheads, Wilkerson should abandon its existing cost system and move to activity-‐based costing. The profitability analysis indicates that the company earns healthy margins on pumps and valves. However, the margin of flow controllers at actual usage of capacity is negative. Wilkerson should consider action targeted at cost reduction (changes in flow controllers design or in their production and delivery process) or raising the price of flow controllers for customers. Since flow controllers are customized, the company can set different prices for different customers (groups of customers) based on the actual amount of resources spent (e.g. implement activity-‐based pricing). Problem Wilkerson has to estimate the profitability of its products in order to make long-‐term product mix decisions. These decisions should be based on estimation of product costs and might include decisions to continue / stop production of a particular product, pricing decisions, and decisions concerning product and process design, including customer...
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...Section 1, Group 11 Group Members: Alex Schaefer, Shilpa Sitaram and Tushar Bhandari Assignment #1: Wilkerson Company Case 1) The existing cost system allocates overhead based on each product’s proportion of direct labor costs. The rate per unit of direct labor cost is 300% for all product groups. This results in the following cost breakdowns: 2) When you use an activity based cost model the allocations are as follows: Product Profitablity analysis | | | | | Valves | Pumps | Flow Controllers | Direct Labor cost | 10.00 | 12.50 | 10.00 | Direct Material cost | 16.00 | 20.00 | 22.00 | Manfuacturing overhead ( rellallocated) | 20.17 | 25.70 | 83.38 | Standard unit cost | 46.17 | 58.20 | 115.38 | Target selling price | 86.15 | 107.69 | 95.38 | Planned gross margin | 35.00 | 35.00 | 35.00 | Actual selling price | 86.00 | 87.00 | 105.00 | Actual gross margin | 46.32 | 33.10 | -9.88 | In the ABC method the standard unit costs and gross margins are dramatically different. The standard unit costs for Valves and Pumps have dropped while the standard unit cost for Flow Controllers has increased. Accordingly, the gross margin for Valves and Pumps has increased and the gross margin for the Flow Controllers has dropped (into the negative). In the ABC pricing model costs better reflect the actual costs involved in delivering a finished product. Production for Valves and Pumps is a simpler operation than producing Flow Controllers. Flow Controllers have...
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...Case write-up: Cost Management Wilkerson Company The problem – Current method of volume based costing Wilkerson Company is engaged in the manufacturing of valves, pumps and flow controllers. Its major problem is the very low pre-tax operating income of 3%. This problem can be majorly attributed to the pricing policy which the company follows. Because of the pricing policy, the company is able to earn fairly good margins on valves and flow controllers but is lagging way behind the target in the margin earned from the pumps. Margin Calculation Valves Pumps Flow Controllers Planned Selling Price $86.15 $107.69 $95.38 Actual Selling Price $86 $87 $105 Per unit volume based costing $56 $70 $62 Margin (with planned S.P.) 35.0% 35.0% 35.0% Margin (with actual S.P.) 34.9% 19.5% 41.0% Solution – Abandon volume based costing and shift to activity based costing Since the three products viz. valves, pumps and flow controllers differ in their consumer segments, they can be priced based on their specific characteristics. Further we see that the machine related expenses exceptionally high and pumps are used for a major chunk of total machine hours. A low priced pump is thus eating away the profits being earned by valves and flow controllers. The company should shift to activity based costing so as to properly divide the activity-related costs in a proper way. The activity based costing will divide major expenses in a more justified manner and hence will present a clear picture...
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...For the exclusive use of J. Wang, 2016. 9-101-092 REV: AUGUST 5, 2003 ROBERT S. KAPLAN Wilkerson Company The decline in our profits has become intolerable. The severe price cutting in pumps has dropped our pre-tax margin to less than 3%, far below our historical 10% margins. Fortunately, our competitors are overlooking the opportunities for profit in flow controllers. Our recent 10% price increase in that line has been implemented without losing any business. Robert Parker, president of the Wilkerson Company, was discussing operating results in the latest month with Peggy Knight, his controller, and John Scott, his manufacturing manager. The meeting among the three was taking place in an atmosphere tinged with apprehension because competitors had been reducing prices on pumps, Wilkerson’s major product line. Since pumps were a commodity product, Parker had seen no alternative but to match the reduced prices to maintain volume. But the price cuts had led to declining company profits, especially in the pump line (summary operating results for the previous month, March 2000, are shown in Exhibits 1 and 2). Wilkerson supplied products to manufacturers of water purification equipment. The company had started with a unique design for valves that it could produce to tolerances that were better than any in the industry. Parker quickly established a loyal customer base because of the high quality of its manufactured valves. He and Scott realized that Wilkerson’s...
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...R Marcin Wilkerson Company Case 1. What is Wilkerson’s competitive situation? What is the problem? Wilkerson’s competitive situation is with the other competitors that are making the same pumps lowered the prices so Wilkerson had to do the same thing. The problem with that is now Wilkerson is losing a gross profit of sales at 20%. Wilkerson will now have to think about its overhead costs to stop losing profit at the new price they are selling their pumps. 2. Should executives abandon overhead assignment by adopting a contribution margin approach (i.e. variable costing) in which overhead is treated as a period expense? Why? Why not? Yes they should adopt the variable costing when it comes to overhead so that they can actually see where the costs are being spent per period. They really don’t have the option of increasing the price so they are going to have to cut back on certain activities. Variable costing will help determine in what area they can do that in. 3. Describe Wilkerson’s current cost system? What works? What does not? The current cost system is the variable based costing, because it divides up direct labor, materials and overhead based of each of the three products that are produced. Product | Valves | Pumps | FlowControllers | Total | Production | 7,500 | 12,500 | 4,000 | 24,000 | DL | 75,000=$10*7,500 | 156,250=$12.50*12,500 | 40,000=$10*4,000 | 271,250 | DM | 120,000=$16*7,500 | 250,000=$20*12,500 | 88,000=$22*4000 | 458,000 | DL+DM...
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... Amanpreet Mann SUBMITTED TO: Prof. Ting He CASE: Wilkerson Company Introduction Wilkerson Company is in the business of manufacturing valves, pumps and flow controllers. Wilkerson is currently faced with declining profit margins relative to industry competitors. Severe industry wise price cuts in the pump business, which is Wilkerson’s major product line, has badly affected the company’s margins (Gross margin below 20% as against a planned gross margin of 35%). The firm has identified the need to investigate its costing mechanisms and determine their credibility comparable to those exercised elsewhere in the market. The need of the hour for Wilkerson is to identify the proper mix of its product line to regain its profitability. Wilkerson is a quality leader, but this leadership may soon be contested be several competitors. Competitive firms have adopted a strategy of measuring profitability proportionate to the contribution margin i.e. price less variable cost. Wilkerson is considering adopting similar mechanisms and has multiple operational opportunities for re-measurement. Of particular concern, the question is whether Wilkerson’s cost inhibitive production of water purification pumps, and their inability to accurately assign the manufactured cost of the product relative to industry competitors, resulting in a 15% decline in total periodic gross margin?! The problem in the current pricing method used by Wilkerson is that the real manufacturing cost of each product...
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...ROBERT S. KAPLAN Wilkerson Company The decline in our profits has become intolerable. The severe price cutting in pumps has dropped our pre-tax margin to less than 3%, far below our historical 10% margins. Fortunately, our competitors are overlooking the opportunities for profit in flow controllers. Our recent 10% price increase in that line has been implemented without losing any business. Robert Parker, president of the Wilkerson Company, was discussing operating results in the latest month with Peggy Knight, his controller, and John Scott, his manufacturing manager. The meeting among the three was taking place in an atmosphere tinged with apprehension because competitors had been reducing prices on pumps, Wilkerson’s major product line. Since pumps were a commodity product, Parker had seen no alternative but to match the reduced prices to maintain volume. But the price cuts had led to declining company profits, especially in the pump line (summary operating results for the previous month, March 2000, are shown in Exhibits 1 and 2). Wilkerson supplied products to manufacturers of water purification equipment. The company had started with a unique design for valves that it could produce to tolerances that were better than any in the industry. Parker quickly established a loyal customer base because of the high quality of its manufactured valves. He and Scott realized that Wilkerson’s existing labor skills and machining equipment could also be used to produce...
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...1. What is the competitive situation faced by Wilkerson? There is a different competitive level in every Wilkerson product line. Pumps, the major commodity product line is facing a very stiff price competition, which is behind the decline in the company profits and actual gross margin to less than 20%, compared to 35% planned gross margin. Consequently, the Wilkerson company needs to reduce the price every month to maintain the market leader position. Wilkerson produces high quality products such as Valves, as well. Here Wilkerson gained very strong customer base and its competition seems to be moderate now. The firm also succeeded to maintain the actual gross margin around 35%. On the other hand, in the long run the company should be prepared to face strong price competition. Additionally, there is a very inelastic demand in the Flow Controllers product. The company has recently raised the price by more than 10% with no apparent effect on demand. We assume that the competition is not very intense yet. 2. Given some of the apparent problems with Wilkerson’s cost system, should executives abandon overhead assignment to products entirely by adopting a contribution margin approach in which manufacturing overhead is treated as a period expense? Why or why not? The problem Wilkerson is facing due to its cost system is that the real manufacturing cost of each product includes very high proportion of overheads (52.5% of the total costs). This cost system distorts the real...
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...Case “Wilkerson Company” • The case is available for purchase at the NYUBookstore as a digital coursepack (in store or online at http://www.bookstores.nyu.edu). • Form your own group of at most 4 students (including yourself). Each group submits one solution. Show your calculations for problems 2-5. 1. What is the competitive situation faced by Wilkerson? 2. What is the structure of the existing (traditional) costing system? Evaluate the features of this system. Should Wilkerson abandon its overhead cost allocation system and make managerial decisions based on contribution margin (price less variable costs); thereby in effect using marginal costs rather than average costs? Note: only direct materials and direct labor costs are assumed to be variable here. 3. Compute revised product costs based on an ABC (activity-based costing) analysis. Interpret your findings regarding the profitability of the different products. 4. Should Wilkerson worry about whether they are at or below full capacity when computing the OH rates? For example, March was a “typical month”, but at other times last year the demand was higher (machine hours = 12,000 vs. 11,200; 180 runs vs. 160; and 400 shipments vs. 300). Discuss verbally the issues involved. 5. Ignore the information given in 4. Suppose Wilkerson begins the month of March with zero inventory. Over the course of the month, they sell the entire output of valves and flow controllers, but only half of the pumps they are producing...
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...WILKERSON COMPANY Executive Summary: The Wilkerson Company is not currently accounting correctly for their costs. They should be using an Activities Based Costing method and they will see that Flow Controllers are actually costing them significantly more than their other products and more than is reflected in their current accounting system. Actual gross margins will change noticeably with an Activities Based Costing system. Even operating at full capacity, Flow Controllers at the current price contribute only a .9% profit margin. Wilkerson Company managers have several options to choose from to change their company’s profitability. They have the opportunity to raise the price of Flow Controllers. They may choose to drop this product line completely, or raise the price significantly to achieve their target of 35% profit margin. What Wilkerson Company management views as an inexpensive way to allocate overhead costs is actually a very costly way, because it does not accurately reflect the profitability of their products. Attributing 300% overhead cost to each product is an inappropriate cost allocating method. Using their current method overhead activity is not in proportion to true variable costs. Wilkerson Company also has an opportunity to reduce costs and increase profitability by using unused capacity to reduce variable costs per unit. ------------------------------------------------- From Exhibit 1 Variable Costs are as follows: Machine-related expenses $336...
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...market and production complexity for each product, and marketing concerns. Wilkerson is a manufacturing company specializing in manufacturing components for water purification systems; the company makes valves, pumps, and flow controllers. Wilkerson is a supplier to companies that actually manufacture the water purification equipment. The relevant officers of the organization are: * Robert Parker, President * Peggy Knight, Controller * John Scott, Manufacturing Manager According to the United States International Trade Commission, “U.S. exports of water filtration and purification equipment reached $1.8 billion in 2011, increasing by 20 percent since 2007 and by 110 percent since 2002, with Asia the leading export destination. Due to insufficient availability of water, rising incidence of extreme weather events, and increasing global demand for water resulting from demographic shifts, urbanization, and industrialization, U.S. exports of water treatment equipment are expected to remain high.” So, it is safe to assume that this is a highly competitive industry with high barriers to entry and attractive growth prospects due to the fact that this is an industry that is arguably in the Growth Phase of the industrial life cycle. The high barriers to entry can be attributed to the complex nature of the equipment, the production process, and volume. The current situation for Wilkerson is that 2 out of its 3 product lines are currently underperforming the target...
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...Case “Wilkerson Company” • The case is available for purchase at the NYUBookstore as a digital coursepack (in store or online at http://www.bookstores.nyu.edu). • Form your own group of at most 4 students (including yourself). Each group submits one solution. Show your calculations for problems 2-5. 1. What is the competitive situation faced by Wilkerson? 2. What is the structure of the existing (traditional) costing system? Evaluate the features of this system. Should Wilkerson abandon its overhead cost allocation system and make managerial decisions based on contribution margin (price less variable costs); thereby in effect using marginal costs rather than average costs? Note: only direct materials and direct labor costs are assumed to be variable here. 3. Compute revised product costs based on an ABC (activity-based costing) analysis. Interpret your findings regarding the profitability of the different products. 4. Should Wilkerson worry about whether they are at or below full capacity when computing the OH rates? For example, March was a “typical month”, but at other times last year the demand was higher (machine hours = 12,000 vs. 11,200; 180 runs vs. 160; and 400 shipments vs. 300). Discuss verbally the issues involved. 5. Ignore the information given in 4. Suppose Wilkerson begins the month of March with zero inventory. Over the course of the month, they sell the entire output of valves and flow controllers, but only half of the pumps they are producing...
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...Wilkerson Company manufactures water purification equipment with unique high quality valve design. Recently, the company has experienced deterioration in pre-tax margins to below 3%, far below the historical 10% margins and sales has fallen bellow 20% due to competitive situation that is driving prices down on Pumps (commodity products). These products are produced in high volumes for a market with high price competition. Wilkerson is a quality leader, but should be prepared to compete on price. The price competition had lead Wilkerson to analyze its production volume based allocation system. 2. Given some apparent problems with Wilkerson’s cost system, should executives abandon overhead assignment to products entirely by adopting a contribution margin approach in which manufacturing overhead is treated as a period expense? Why or why not? 3. Prepare the following calculations: a. Calculate the unit product cost for each product using the direct-labor-based cost allocation system. b. Calculate the unit product cost for each product using activity based costing to allocate the cost of manufacturing overhead, as well as profitability for each product line. Overhead cost pools include machine, setup, receiving/scheduling, engineering support and packing/shipping products. 4. Why have cost shifts occurred? 5. Looking only at product costs under the direct-labor-based cost allocation system, what actions can management take to reduce product costs? ...
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