Submitted by:

Submitted to:
Your Name: Swapnil Agrawal
Prof. Archana Patro
PGP I, Roll no-152, Sec: B our!e In!tructor:
"ana#ement Accountin#
Re$ection Pa%er 1
12-Se%-2&1'
Wilkerson Company
Executive Summary:
Robert Parker, the president, Peggy Knight, controller and John Scott,
manufacturing manager of the Wilkerson Company were discussing operating
results of the previous month. The competitive situation varies for Wilkersons
across its products. Pump and fow controllers are on the opposite sides of the
industry. Pumps are commodity products, produced in high volumes for a
market with severe price competition. Flow controllers, on the contrary, are
customized products, sold in a less competitive market with inelastic demand at
the current price range. The third product, valves, is standard, produced and
shipped in large lots. Wilkerson is a quality leader, but this leadership may soon
be contested by several competitors. Although they are able to match Wilkersons
quality, there are no signs of price competition yet. Nevertheless, in the long-run
Wilkerson should be prepared to compete on price. Existing (pumps) and
potential (valves) price competition pushes Wilkerson to analyze its overhead
costs, since no reserves of cost cutting are left in its supply chain (both customer
and suppliers agreed to just-in-time delivery).
Taking into account the diference among product and high proportion of
overheads, Wilkerson should abandon its existing cost system and move to
activity-based costing. The proftability analysis indicates that the company
earns healthy margins on pumps and valves. However, the margin of fow
controllers at actual usage of capacity is negative. Wilkerson should consider
action targeted at cost reduction (changes in fow controllers design or in their
production and delivery process) or raising the price of fow controllers for
customers. Since fow controllers are customized, the company can set diferent
prices for diferent customers (groups of customers) based on the actual amount
of resources spent (e.g. implement activity-based pricing).
Issue:
Wilkerson has to estimate the proftability of its products in order to make long-
term product mix decisions. These decisions should be based on estimation of
product costs and might include decisions to continue / stop production of a
particular product, pricing decisions, and decisions concerning product and
process design, including customer relations.
Possible Solution:
Activity-based costing allows tracing indirect costs to product with a high degree
of accuracy. While volume-based costing is indirectly based on an assumption
that theres a direct relationship between volume of production of individual
products and level of overhead, activity-based costing allows fnding individual
relationships between volume of production and diferent overheads. It becomes
possible due to combining overheads into cost pools and allocating these cost
pools to products in proportion to selected cost drivers that refect these
individual relationships between volume of production and level of overheads.
Wilkerson should pool overheads into fve groups (cost pools): machine-related
expenses, setup labor cost, receiving and production control, engineering,
packaging and shipment. The next step is choosing most appropriate cost drivers
that refect the relationship between volume of production of individual products
and level of overheads. Machine hours are the most natural cost driver for
machine-related expenses. Both setup and receiving, and production control
activities are changed in proportion to number of production runs. Engineering
cost can be allocated in proportion to hours of engineering work, whereas
packaging and shipment activity is driven by the number of shipments.