Superior Manufactoring

Assuming that the company’s goal is to maximize profits, the current cost system is not an appropriate tool for strategic planning. The ambiguity of the overhead costs per product makes it difficult to accurately analyze the cause and effect relationships of changes and/or improvements to specific product line.

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.

Overhead costs need to be accounted for this way we can understand just how much cost goes into producing each unit. There are other cost factors that contribute to the product aside from labor and material. Since the projected and the actual sales volumes do not align Kelly should be concerned with the other

Although the company did show an increased gross profit of $8,255,000 with $6,358,000 less Net Sales in 2013 versus 2012, that increase is due to the reduction in product Cost of Goods Sold by $14,613,000. Since increases in product price will negatively affect sales, one of management’s primary goals is to keep prices stable. This objective is achieved through implementation of cost cutting programs, investing in more efficient equipment, and automation of more steps in the production process.

Because the absorption-costing model only deducts the fixed manufacturing overhead costs for units sold in the current period, the COO was able to show an increase in profits between 2002 and 2003. What the COO failed to report to the stakeholders on the 2003 income statement was the outstanding fixed manufacturing overhead costs for the remaining 35,000 units

Overhead costs are not in proportion to the production output because of the method they are using. This leads to inaccurate pricing and costing decisions. An Activity Based Costing System would help find the real relationship between the products produced and overhead.

Another concern identified, is the utilities expense budget for utilities in Year 9 which is $150,000. This amount is identified as a fixed amount and is unrelated to actually production activities and manufacturing efficiency. Considering that production levels and activity fluctuates throughout the year, the budget for utilities should be a variable item. An example; from Year 7 to Year 8, the utilities expenses increase by $15,000 and with this detection, ways to reduce this expense should be investigate. Another concern is a duplicated line item under the Selling, General, and Administrative Budget for Utilities and Utilities and Services. Another issue for concern, Total Variable Cost was reported to be lower; however was not enough for the lack of sales combined with an increase in advertising and transportation which resulted in an overall negative result. The low Net Sales directly impacted the Contribution Margin which decreased by $49,397. Overall, these concerns indicate the need for a flexible budget with variance analysis.

Company Q has had a large demand from their customers to provide healthy and organic foods over the last few years. They recently started offering a small variety of health and organic food items, which is a step in the right direction toward being socially responsible. They need to be more attentive to the needs and wants of their customers as it shouldn’t have taken years to bring in these demanded products. When there is a demand for products and the company doesn’t respond to that demand, it’s perceived by the consumers that the company simply doesn’t care about their needs and wants. Bringing in a selection of these products was a good start in satisfying their customers. However, with such a demand for these items, having a small and limited selection is just not enough. Expanding the line of health and organic food items will accomplish two things. First and foremost it will appease the current customers and bring in a new clientele that is health conscious, thus helping to create a healthier community and at the same time increasing sales. The higher margin on the health and organic items coupled with the increase in sales will really boost the overall profit margin of the company. Company Q does need to be sure that they don’t over price these products so as to not push away business due to overpricing.

Wilkerson employs a Normal Cost System, which means that they use predetermined overhead rates along with actual costs for direct material and direct labor. Normal costing systems are appropriate when overhead costs are a relatively small percentage of total manufacturing costs and product diversity is limited. For Wilkerson, normal costing does not make sense. Overhead costs make up over 50 percent of total manufacturing costs and their product offering is relatively more diverse. This indicates that the current accounting system in place may be distorting costs significantly. Supporting data:

6.) The Wilkerson Company original case is not effective and accurate without including an ABC analysis. ABC allowed us to assess the business performance of each of its businesses including: Valves, Pumps and Flow Controllers. This enabled us to realize that the Flow Controllers business is not profitable with a Gross Margin of -11.31%. I recommend specifically solving the problem of pre-tax margin going from 10% to less than 3%. The strategic decisions that need to be made are improving the unprofitable Flow Controllers business unit, while simultaneously increasing the sales of the more profitable Valves and Pumps business units. I would capitalize on the highest margin business of the Valves. Specifically, I would develop marketing strategies on how to grow market share in this business. I would assess what we are doing in this business and I would reapply it to our other businesses. This would include evaluating and eliminating costs in the other business units,

Q1. Based on the 2004 statement of profit and loss data (Exhibits 1 and 2), do you agree with Water’s decision to keep product 103?

7. Though numbers given in the cost data can not be contested, I would definitely contest the way total cost has been computed. The item 345 department operates within a large manufacturing facility that churns out number of other products too. Hence judging the profitability of item 345 on the basis of total cost is not practical.

WMC’s accounting practices incorrectly attribute fixed manufacturing costs to the three Detroit groups in a proportional manner, leading to Group 3’s lack of profitability. Discontinuation of Group 3 pushes a greater percentage of the fixed costs to the other groups impacting their ability to be profitable. Additionally, WMC does not consider the degree to which production at the Detroit plant contributes to the operations and

with a number of strategic issues facing a capital-intensive, mature industry. Their product costing system was

Do you agree with Water’s decision to keep product 103? Continue Production End Production Sales (Net) $ 26,670,000 $ - (Less) Rent $ 1,882,000 $ 1,882,000 Property Taxes $ 401,000 $ 401,000 Property Insurance $ 534,000 $ 534,000 Compensation Ins. $ 458,000 $ - Direct Labor $ 6,879,000 $ - Indirect Labor $ 2,309,000 $ - Power $ 302,000 $ - Light and Heat $ 106,000 $ - Building Service $ 75,000 $ 75,000 Materials $ 4,851,000 Supplies $ 350,000 $ - Repairs $