Secondly, TAC is quite ideal for the mass produced products which requires labor intensive process, but not sufficiently flexible to accommodate different production situations Management accounting wilkerson company case we just mentioned.
The reason of going up is not because of increase in profit, but due to the re-calculating the cost and revenue by using different costing method which is relatively close to the reality. Garrison and Eric W.
However, such method brings to the wrong company data on gross margin and pre-tax operating income. For example, to produce 4, units of flow controller, we need to consume production runs and hours of engineering work.
However, we cannot make sure the alternative opportunities can perform better than flow controllers. Since products required to be ever changing to meet the needs of customers in order to be more competitive in the market.
With the figures we have from TAC originally and we now generated the figures under ABC system, we can obviously make the comparison between these two methods in the following paragraph. However, the setting of cost drivers may not Management accounting wilkerson company case explain the cost behaviour because of the selection and coordination appropriateness may varies from subjective preferences or company culture.
With knowing the cost in each production activity, managers can customise different market situations so that the company can identify which products are most profitable and where to focus sales efforts. Assign costs to activity cost pools 4. Calculate activity rates 5.
Of course, more value added service may be required at such price so as to reduce any effects on demand. Since the company using the traditional absorption costing TAC in which costs are accumulated in a pool and then allocated to specific products based on a single, plant-wide base, such as direct labor hours utilized in producing the product.
At this point, we can pressure on the salesperson to close more deals to compensate the low volume cost. Noreen to implement an ABC system as below: Besides that, flow controller also has a highest number of shipments per month compared to pump and valve.
This indicates that the current overhead cost allocation practice did not reflect the real costs incurred on the products. In addition, the figures of manufacturing overheads have also been changed based on the calculation of each manufacturing process in terms of the actual numbers of activities have been taken place for each product lines.
In ABC, there are cost drivers, i. To improve the accuracy of the manufacturing overhead cost allocation, the company should adopt the Activity-Based Costing ABC method as the current cost system does not reflect the market behaviour that fit with product profitability as we mentioned before.
The lower actual gross profit obtained was mainly due to wrong cost allocation on the pump product.
In addition, Wilkerson has a group of loyal customer base for their Valves and major product line Management accounting wilkerson company case Pumps sustaining in market.
In summary, we know that Robert Parker is facing an issue of cost misallocation on the production lines. At this point, TAC cannot be compatible with the changing needs of customers on different needs of cost allocation under severe competitive environment.
For the TAC, firstly, it is relatively easier to manage since it mainly takes the direct labor cost into account in considering cost allocation in production process; however, there are different types of industries with the needs of requiring different cost structure so as to provide an accurate company data in use, especially if a large company have variety of products and services which obviously have different labor and other costs allocation in each activity, so TAC could not provide a real picture on cost allocation which causes managers could not make the appropriate decision based on such costing method.
With the use of TAC, the gross margin on pump sales is If Wilkerson still keeps using TAC, managers will be easily misled by the existing cost report, so that the senior management may not be able to have a real picture on making the correct decision towards the business planning.
Since we have all these relevant drivers that designed to provide more accurate information about production and support activities and product costs so that management can focus its attention on the products and processes with the most leverage for increasing profits.
However, there is an increase in cost of producing Flow Controllers Also, the distribution of manufacturing overheads to the total cost ratio is much greater than the direct labor to total cost ratio which means the TAC system cannot provide accurate cost information to the managers since it mainly takes the labor cost into account.
The main learning outcome from analyzing the above information about Wilkerson Company is manufacturing overhead cost allocation. Assign costs to cost objects using the activity rates and activity measures previously determined 6. In light of this, the advice of recommending Activity-based Costing ABC instead is mainly tackle the existing costing issue because ABC allocated staff and overhead costs to products based on how the products actually consumed or generated the costs.
Identify and define cost pools and cost drivers 2.Management Accounting for Multinational Companies Solution to the Wilkerson Case Igor Baranov Executive Summary Taking into account the difference among product and high proportion of overheads, Wilkerson should abandon its existing cost system and move to activity-based costing.5/5(1).
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.
Wilkerson Accounting Case 1. what actions might Wilkerson’s management team consider to improve the company’s profitability?
The approach to this question was to: • Understand key issues in the current profitability structure • Make recommendations for each product line • Suggest changes to the general profitability approach.
Cases Wilkerson Company is a simple activity-based costing case. It requires students to calculate the costs of three products using on a new set of cost drivers, to compare those costs with those calculated using traditional direct labor-based allocation bases, and then to understand what the numbers mean.
Management Accounting-- Wilkerson Company Case Words | 11 Pages. The purpose of this report is discussing the case of Wilkerson Company that confronting tough competition in price cutting in pumps which caused to a big drop of pre-tax operating income from 10% to 3%. The purpose of this report is discussing the case of Wilkerson Company that confronting tough competition in price cutting in pumps which caused to a big drop of pre-tax operating income from 10% to 3%.
After observing the existing costing allocation, we found out there is an issue on the existing.Download