Case Study: Wilkerson Company
• Wilkerson: The Company
• Competitive Situation
• Current Cost System
• Development of ABC System
• Costing/ Performance Improvement
Comparison of Costing Results
Wilkerson: The Company
Principal target: supplied products to manufacturers
of water purification equipment
• Valve à Original Product
• Flow Controller
• Wilkerson is operating in a
competitive environment and
has to compete with their
competitors by reducing prices
for one of their core products
• 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
• Wilkerson has set several
financial and performance
objective such as a 35% gross
margin, or a 3% net profit
• 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 is not meeting the
financial objectives which
implies an issue with their
• 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.
• 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
Current Cost System: Issues
Direct Labour = 10
Direct Material = 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.
Machine Rel. Exp (100)
Setup Labour (50)
(!) 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).
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
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.
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