Wilkerson Case Study

Topics: Cost, Revenue, Cost accounting Pages: 16 (2676 words) Published: January 28, 2015
Case Study: Wilkerson Company

Group 8:
Dimitar Balevsky
Torey Crayton
Nicholas Marshall
Martina Pozzoli
Anakaren Sanchez
Alexandre Tricoire
Farrah Wasebailey

PwC

Contents
•  Wilkerson: The Company
•  Competitive Situation
•  Current Cost System
•  Development of ABC System
- 

Allocation Bases

- 

Results

•  Costing/ Performance Improvement

PwC

- 

Price Rise

- 

Cost Cut

- 

Production Cut

• 

Comparison of Costing Results

• 

Recommendations

December 2014
2

Wilkerson: The Company
Sales
Velves

Pumps

19%

Flow Cotrollers

Manufacturing Company
Principal target: supplied products to manufacturers
of water purification equipment
3 products:

30%

•  Valve à Original Product
•  Pump

51%

Production
Process

PwC

•  Flow Controller

Purchase of
semi-finished
components
from several
suppliers

Introduction of
complementary products

Parts are
machined and
assembled

Products are
packed and
shipped to
costumers

Competitive Situation
Activities
•  Wilkerson is operating in a
competitive environment and
has to compete with their
competitors by reducing prices
for one of their core products
“pumps”.
•  The company produces “Valves”,
“Pumps”, and Flow Controllers.
•  Valves and Pumps are their high
volume products that require
relatively little overhead costs.
•  Flow Controllers is the product
that has the least production
output but which is a prime
product as the company is a
market leader especially for this
product.

PwC

Challenges
•  Wilkerson has set several
financial and performance
objective such as a 35% gross
margin, or a 3% net profit
margin.
•  Their high volume products need
to capture further market share.
•  Their prime product “Flow
Controllers” is currently
perceived to make great profits
and being a profitable product to
the company.
•  The company is not meeting the
financial objectives which
implies an issue with their
costing
•  No product can be abandon from
the production set as Wilkerson
might lose its reputation as a
prime brand offering a wide
range of products.

Industry
•  Competitive industry with
several rivals in the sector
providing similar products such
as Valves and Pumps.
•  Customers would be willing to
purchase other products of
competitors if prices are less and
quality is similar.
•  Costing is a crucial issue for the
company to survive in this
industry.

December 2014
4

Current Cost System: Issues

P1

P2

P3

Direct Labour = 10

DL

DL

DL

Direct Material = 20

DM

DM

DM

50

30

20

25

15

10

Packaging (100)

50

30

20

Machine Hours

50%

30%

20%

Overhead (300% of
DL) = 30
Cost = 60
• 

Absorption Costing takes direct and
indirect (overhead) cost into account. The
indirect costs are allocated based on one
or very few bases.

• 

In the Case of Wilkerson Corporation, the
company accounts for direct costs, such as
“direct labour” and “direct material” as
well as indirect or overhead costs, which
are calculated as 300% of direct labour.

PwC

Machine Rel. Exp (100)

Setup Labour (50)

Base:
Machine
Hours

(!) Left diagram: current method of costing at Wilkerson.
Right diagram represents general allocation method of using
one basis for all costs.

• 

This is a very simplified calculation which
saves time, but is not necessarily accurate
(as to be outlined in this report).

December 2014
5

Current Cost System: Issues
• 

Currently costing is operating on simple
Overhead Absorption Rates (OAR).

• 

OAR is obtained by dividing the total
manufacturing overheads by the total
activity level.

• 

Overheads are then charged with respect to
labour hours spent.

• 

Wilkerson’s OAR is obtained by taking
300% of the respective product’s
labour cost and adding it to all direct costs.

• 

Under...
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