Management Accounting-- Wilkerson Company Case

2663 Words Nov 10th, 2010 11 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
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In using the ABC system, Valves and Pumps are matching the company’s target of 35% of gross margin apart from Flow Controllers. With the use of TAC, the gross margin on pump sales is 19.5% that well below the company's target gross margin of 35%. This indicates that the current overhead cost allocation practice did not reflect the real costs incurred on the products. The lower actual gross profit obtained was mainly due to wrong cost allocation on the pump product.

Table 4: Product Profitability Analysis TAC ABC Valves Pumps Flow Controllers Valves Pumps
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