Management Accounting-- Wilkerson Company Case

2677 WordsNov 24, 201011 Pages
The purpose of this report is discussing the case of Wilkerson Company that confronting tough competition in price cutting in pumps which caused to a big drop of pre-tax operating income from 10% to 3%. After observing the existing costing allocation, we found out there is an issue on the existing costing report that the manager could not be able to see the real situation. In light of this, there will be brought to the discussion on the feasibility of using an alternative costing method – Activity based costing (ABC) in the latter paragraphs. The issue of misallocation cost With the use of Traditional Absorption Costing (TAC) which means Wilkerson Company is now only put the costing of direct labor and material in place. As we can see…show more content…
Therefore, Wilkerson Company can set strategic products planning efficiently and effectively based on these costing structures. Table 6: Distribution of Overhead Costs Valves ($) Pumps ($) Flow Controllers ($) Total ($) Direct Labor 75,000 28% 156,250 58% 40,000 15% 271,251 100% Direct Material 120,000 26% 250,000 55% 88,000 19% 458,001 100% Manufacturing Overheads - Machine Related Expenses 112,500 33% 187,500 56% 36,000 11% 336,001 100% - Setup labor 2,500 6% 12,500 31% 25,000 62% 40,000 100% - Receiving and production control 11,250 6% 56,250 31% 112,500 62% 180,000 100% - Engineering 20,000 20% 30,000 30% 50,000 50% 100,001 100% - Packaging and shipping 5,000 3% 35,000 23% 110,000 73% 150,000 100% Total Manufacturing Overheads 151,250 19% 321,250 40% 333,500 41% 806,002 100% Total Cost Allocation 346,250 23% 727,500 47% 461,500 30% 1,535,251 100% After examining the costing structures in TAC and ABC systems, we can differentiate these two costing methodologies in terms of advantages and disadvantages. For the TAC, firstly, it is relatively easier to manage since it mainly takes the direct labor cost into account in considering cost allocation in production

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