Wilkerson Company Accounting
Currently, the direct labor costs are used to assume MOH; therefore, if direct labor increases, so does MOH. Real costs incurred are not reflected by this.[pic 1][pic 2][pic 3][pic 4][pic 5][pic 6][pic 7][pic 8][pic 9][pic 10][pic 11][pic 12][pic 13][pic 14][pic 15][pic 16][pic 17][pic 18][pic 19][pic 20][pic 21][pic 22][pic 23]4. In order to improve the profitability margin, Wilkerson’s needs to target the flow controllers due to the negative gross margin. As the case stated, they recently raised the price by 10%, which resulted in the demand being unaffected; meaning it is inelastic. Wilkerson’s should continue with this strategy while keeping a close eye on the market to ensure that demand is not affected. If Wilkerson’s continues to raise the price in 5% increments, they will eventually reach their target 69%. However, based off of the ABC model, it might also be in Wilkerson’s favor to consider discontinuing the product. On the other hand, the case also mentions that there is now a demand for different types of flow controllers. Wilkerson could change their strategy to a more customer relationship building method. Producing different types of flow controllers definitely impacts costs, therefore Wilkerson could segment their production in favor of the highest purchasing volume customers. Improving the profitability margin on the valves will be a completely different process. Wilkerson’s gross margins already surpass the company’s target. Competitors have caught up to Wilkerson’s and are now able to create valves of the same quality. In order to improve the profitability margin, Wilkerson’s should invest profits into R&D in order to put themselves ahead of the game. In regards to the pumps, Wilkerson’s currently leads the market. They did however have to lower their prices in order to match their competitor’s which resulted in a decrease in their gross margins. Since the pumps are a high commodity product, in order to sustain at the top of the market Wilkerson’s will either need to invest in R&D to create an add-on service or operate on a higher level of volume. Another idea would be to create loyalty programs with key accounts that they have built relationships with. These loyalty programs could involve specific discounts based off of the amount of pumps purchased. As a company in general, Wilkerson’s should reevaluate their targets so that management can accurately allocate their resources. 5. I have several concerns. First, deciding on an allocation base to use for the set-up hours. I do not think that the current method is sufficient for cost tracking. The components of each product should be considered when estimating these costs. My second concern is the packing and shipping. There is a flat fee of $500 per shipment. I do not think that this is accurate at all since the size of the shipment is not being considered. There is a fixed cost of $500, and it does not differ to ship 10 or 10,000 units. My final concern is the allocation of the selling and administrative expenses. I assumed these to be fixed expenses in order to simplify the costing model. I This decision was made due to lack of information. No information was provided that would help to allocate expenses amongst the three products. If provided with this information, the costing system would be much more accurate because we could then allocate the costs to the pumps, valves, and flow controllers.
In terms of more information, I would have liked to have an order breakdown. Orders should provide a detailed list of all of the materials and number of units in each product. Next, I would like more shipping information. I believe it is important to know if Wilkerson uses third party vendors because tracking and trending this could help limit costs. Finally, customer information would be extremely useful. By keeping track of customer information, the company would be able to manage their accounts more efficiently and gain more loyalty resulting in increased profitability. According to the case study, the flow controllers had the highest margins (41%). However, when looking at the ABC analysis in depth, it is evident that they actually generate at a gross margin of -9.9%. After examining this information, it is safe to say that the product with the highest margin is the valve (46.3%). The ABC model is much more accurate than the CVP calculations because in the CVP calculations, the difference between direct labor costs and MOH are not considered.Wilson faces a number of competitive situations. In the external environment, first, their competitors have been reducing the prices on their pumps. Next, competitors continue to overlook the opportunity flow controllers present: large profit potential. Finally, commodity products compete with Wilkerson in both price and volume. Internally, Wilkerson is suffering from a decrease in their profits due to the prices being lowered on their pumps. Next, since the pumps are the costliest product to produce, it is extremely difficult to increase their profit margins because they receive the lowest margin overall. PumpValveFlow ControllerCVPABCCVPABVCVPABCDL75000750001562501562504000040000DM12000012000025000025000088000080000MOH225000151250468750321250120000333500Differences73,750147,500-213,500PumpValveFlow ControllerCVPABCCVPABVCVPABCDL101012.512.51010DM161620202222MOH3020.1737.525.73083.38Unit Cost5646.177058.262115.38Gross Margin34.9%46.3%19.5%33.1%41%-9.9%[pic 24][pic 25][pic 26][pic 27][pic 28][pic 29][pic 30][pic 31][pic 32][pic 33][pic 34][pic 35][pic 36][pic 37][pic 38][pic 39][pic 40][pic 41][pic 42][pic 43][pic 44][pic 45][pic 46][pic 47][pic 48][pic 49][pic 50][pic 51][pic 52][pic 53][pic 54][pic 55][pic 56][pic 57][pic 58][pic 59][pic 60][pic 61][pic 62][pic 63][pic 64][pic 65][pic 66][pic 67][pic 68][pic 69][pic 70]