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Wilkerson Company Case Analysis

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Wilkerson Company Case


Wilkerson Company was a mid-size manufacturing supplier for water purification equipment. There were three specialized products: high quality and unique valves, high volume pumps and flow controllers. The management in the case was mainly composed of the president Robert Parker, the controller Peggy Knight and the manufacturing manager John Scott. Wilkerson Company used volume-based costing method to calculate its costs at that moment. There were some competition situations faced by Wilkerson. For example, Wilkerson had to reduce pumps price to match lower prices of competitors, which could maintain current sales volume but led to decreased profits. Therefore, the pre-tax margin had decreased to less than 3%, comparing to a 10% historical margins. Under SWOT model, strengths of Wilkerson were as following. Valves had unique design, better tolerances as well as high quality, which lead to a loyal consumer establishment. The company also established a major presence in the high-volume pump product line and the more customized flow controller line. Besides, just-in-time deliveries were established among suppliers, Wilkerson and customers. The main weakness of the company was related to its current costing system. The simple costing system inaccurately allocated cost. The potential problems of it are listed in the Analysis section. For opportunities, on the one hand, flow controllers could make potential profits because sales did not decline when its price increased. On the other hand, Activity-Based costing system could be used as a more accuracy and profitable system to allocate costs. Most of threats came from competitors, such as malicious price cuts and products imitation.

Problems and Issues

The main problem facing by Wilkerson was how to increase its gross margin in the current difficult situation. The amount of gross margin is equal to the total sales minus the cost of goods sold. Therefore, to increase gross margin, two available methods can be provided: increasing sales, or decreasing costs of goods sold. For sales, those three product lines had different situations on profits making. The management had to analysis profitability of each product to decide how to adjust the production. For costs of goods sold, manufacturing overhead costs here accounted for more than 50% of total costs of goods sold. Management had to consider whether other costing system should be chosen to reduce costs. Therefore, there are two issues facing by Wilkerson Company. One is what adjustments of production plan could be taken to improve profitability, another is whether Activity-Based Costing system could calculate costs more accurately to reduce costs of goods sold.


Wilkerson used simple costing system in 2000. It charged direct material and direct labor basing on the number of units of production. Referring to Exhibit 1, the manufacturing overhead cost of each product was simply allocated as 300% of direct labor costs. Flow controllers there had the highest actual gross margin due to a lower direct labor rate. Although it produced the least units, this product line required the most proportion of production runs and shipment as well as engineering work. However, the manufacturing overhead costs were not in proportion with the amount of direct labor costs in fact. The existing method had led to a wrong cost assumption, which affected company’s profitability and then led to wrong cost management decisions.

Activity-based costing system could reduce manufacturing overhead costs in order to reduce total costs of goods sold efficiently. In Wilkerson’s existing system, manufacturing overhead costs accounted for more than 50% in total costs, which substantially affect total costs of goods sold. Comparing with the simple cost accounting system, activity-based costing system allocates manufacturing overhead basing on the real relationship with the production volume. As showing in Exhibit 2, five cost pools are defined, they are machine related expenses, set up labor, receiving and production control, engineering and packaging and shipping. Overhead costs in each cost pool are allocated by the amount of each corresponding cost driver. For example, total machine-related expenses were $336,000 in the March 2000. Its corresponding cost driver was machine hours, which was 11,200 hours in total. Thus, the rate of machine-related expenses was $30 per machine hour. After those rates calculated, manufacturing overhead costs of each product under ABC system could be calculated according to their amounts respectively. In Exhibit 3, under ABC system, direct material costs and direct labor costs are as same as costs under simple cost accounting system, overhead cost there are allocated basing on rates calculated and the amounts of cost drivers.

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