Wilkerson Case Study1

Topics: Cost, Activity-based costing, Cost driver Pages: 5 (1513 words) Published: November 30, 2014
The analysis below is related to Wilkerson Company, which is a manufacturer of a few products supplied to manufacturers of water purification equipment. The three products they manufacture are: 1. Valves- high quality and highest tolerances in the industry; this product is what the company started from. 2. High-volume pumps- quickly became a major supplier of pumps; they manufacture and spend more machine hours on producing this product 3. Flow controllers- most unique and highest selling product. Wilkerson Company would like to be making 35% gross margin on all three products, but the competitors have continually lowered the prices of their pumps. This forced Robert Parker (President of Wilkerson Company) to also lower the company’s price of pumps to maintain volume and status as a major supplier. Unfortunately, this has brought the gross margin for pumps DOWN (below 20%). Wilkerson Company’s competitive situation is to continue competing in the manufacturing of pumps while meeting planned gross margins of 35%. Wilkerson needs accurate product costing to achieve gross margin goals as well as support both the internal and external shareholders that depend on this information. Wilkerson has defined goals for gross margins and in order to hit these, they need to understand their production cost and correct assignment of overhead. This will allow them to determine which products are high margin and should be emphasized in the market. It also allows them to address competitor price moves with confidence. For example, Wilkerson may determine lowering prices and entering a price war is not-advisable if they have a strong customer base and if eroding the margins will threaten the overall business. Likewise, Wilkerson needs accurate cost information to identify opportunities to margins as they did with flow controllers without losing business. Accurate cost knowledge can also help determine indirect resource use and identify areas for investment and improvement. There are also a number of internal and external stakeholders impacted by cost knowledge accuracy. Examples of internal parties impacted by cost accuracy are as follows: Accounting: Responsible for assigning costs and reconciling between actual and normal costing. Pricing: Looks to cost of goods produced to ensure that they are pricing product appropriately to achieve margin goals. Operations: Need to understand how indirect costs are assigned and responsible for improving efficiency and reducing costs. Management: Dependent upon accurate cost information to make decisions that impact all facets of the company, External parties also impacted by the cost knowledge are described below: Investors: Concerned with profitability which is driven off cost of goods sold. Customers: End price may be determined by the allocation of production costs. Wilkerson has always used a simple cost accounting system to assign costs to each product line. Wilkerson has historically used this approach because direct materials and direct labor were already tracked and easy to assign to each product. Wilkerson’s production department’s overhead was then applied at a rate of 300% of the direct labor hours assigned to each product. Since Wilkerson adopted this model, overhead costs have grown to be a much more significant cost driver than direct labor. This trend has been seen across the business environment due to a greater focus on customization, services, R&D, and advanced technology. This last point is especially important as companies have moved to more robots and capital investment to improve capacities and reduce direct labor hours. As a result, direct labor hours are not necessarily representative of the overhead required for each product line. This is supported by Wilkerson’s analysis which found the following: Often multiple machines were operated simultaneously by a single operator while sometimes only a single machine could be operated. Each machined component required set-up time not...
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