Wilkerson Company Case Study
Costs associated with direct labor and direct materials are variable, such that the demand for these resources is directly dependent on the number of product units manufactured. Therefore, these cost driver pools are allocated to unit-level cost objects. The allocation base for direct labor would be the number of direct labor hours used to produce a certain number of product units (figures 1, 2, 3). The allocation base for direct materials would be the number of components used to manufacture a given number of product units (figures 1, 2, 3). Accordingly, the direct labor and direct material costs associated with each product manufactured in March 2000 are derived in table 1.
The task force’s study identifies that the cost driver pool of receiving and production control is based on batch-level cost objects. The same is true for setup labor. Both of these activities are independent of the number of units produced, but are performed each time a batch of components are used towards the production run for a separate product. Accordingly, the cost allocation base for these activities is the number of production runs. (Note that the case does not indicate whether the component, priced at $2, is the same among all 3 products. Therefore, I have assumed that the production runs for each of the 3 product’s components are distinct from each other. Further, I have assumed that the receiving and production control departments also handle the purchasing activity (including price negotiations in annual agreements) for components.
Similar to the activities of receiving, production control, and setup, the packaging and shipping activity is independent of the number of units shipped, and is allocated in batches (number of shipments) for any product.
The case study implies that all costs, except for the direct labor and direct materials, are fixed, and indicates that the amount of work is the same per production run (or shipment) made for