Wilkerson Case Essay

Wilkerson should be aware that its competitors could start dropping the prices of their valves at which time, Wilkerson would need to

Traditional Cost method is defined as “The traditional method of cost accounting refers to the allocation of manufacturing overhead costs to the products manufactured. The traditional method (also known as the conventional method) assigns or allocates the factory 's indirect costs to the items manufactured on the basis of volume such as the number of units produced, the direct labor hours, or the production machine hours. We will use machine hours in our discussion. By using only machine hours to allocate the manufacturing overhead to products, it is implying that the machine hours are the underlying cause of the factory overhead. Traditionally, that may have been reasonable or at least sufficient for the company 's external financial statements. However, in recent decades the manufacturing overhead has been driven or caused by many other factors. For example, some customers are likely to demand additional manufacturing operations for their diverse products. Other customers simply want great quantities of uniform products. If a manufacturer wants to know the true cost to produce specific products for specific customers, the traditional method of cost accounting is inadequate.” AccountingCoach. (n.d.).

Foster a water innovation hub of economic development and commercialization by continuing to work on the development of a water cluster and growing the online marketplace for the water industry.

Prince’s Gate Spring Water was founded over 23 years ago, as a diversification from an existing, family run dairy farm, after the discovery of a natural spring on the land, in the small hamlet of Prince’s Gate, Pembrokeshire.

1. Use the Overhead Cost Activity Analysis in Exhibit 5 and other data on manufacturing

12). Objectives of the ABC cost system that the standard cost system did not cover was “to improve product cost accuracy and optimize the product mix as quickly as possible in order to help improve GEIs unsatisfactory financial performance. The long-term objective was to evolve toward the practice of Activity-Based Management (ABM). More specifically, GEI anticipated that the ABC data could be used to help its product engineers project the cost impact of product design changes, and to help its process engineers and operations managers identify and prioritize process cost-reduction opportunities” (Brewer et al., 2003, para. 13). ABC costing systems offered a better solution for GEI because, “GEI created its own customized ABC software called ACCURATE to capture the data inputs, interface with the standard cost subsystem, and calculate product costs” (Brewer et al., 2003, para. 20). After the ABC system was implemented, “There was a strong consensus across the plants that the ABC system resulted in both improved product-cost accuracy and greater product-cost visibility relative to the direct labor-based system. In spite of the lack of training, nonaccounting personnel intuitively believed that ABC captured the economics of the business better than the labor-based system. At a strategic level, this contributed to better marketing and product-mix decisions, and at the plant level, ABC improved relations with GEI

1. Define and explain the meaning of a predetermined manufacturing overhead rate that is applied in a job-order costing system?

The difference in profitability of the five orders calculated by the ABC system and the company¡¦s existing system:

- Solution: replace the actual cost system (allocation of MOH based on DL$) with an ABC system. 5 activities are identified (machine related, machine setup, receiving and production control, engineering, and packaging/shipping. The new system reveals that Wilkerson is losing money on flow controllers, while valves and pumps are not so bad in terms of profit margins

The cost system in place at Superior Manufacturing did not allow them to see enough of the indirect costs associated with each product. The inability to determine actual costs incurred by each product line inhibits Superior Manufacturing from reporting accurate information. A main example of this is displayed with the indirect expenses associated with each product building. The reports that the management used in the cost system referenced their standard costs, which were based on the previous year prices. If any of the direct costs were actually lower than the standards listed it resulted in higher revenues. A few suggestions that I would recommend to Waters regarding the cost accounting system and reports would to also look at more of the actual sales and expenses in reports. The cost system that is being utilized focuses mainly on past results.

3. Compute the line cost-to-revenue ratio as reported for quarter 1, 1999 through quarter 1, 2002 from the information in Exhibit 1. Refer to Exhibits 2 and 3, and estimate the revised line cost-to-revenue ratio for each quarter after adjusting for a) the release of accruals, b) the line costs that were capitalized, c) other line cost adjustments not discussed in the case, and d) ‘improper’ and ‘questionable’ adjustments to revenue. What do you observe? Q1 99 Q2 99 Q3 99 Q4 99 Q1 00 Q2 00 Q3 00 Q4 00 Q1 01 Q2 01 Q3 01 Q4 01

While using such a simplistic volume measure to allocate overheads as an overall cost driver, this approach seldom meets the cause-and-effect criteria desired in accurate cost allocation. This method of costing has become increasing inaccurate as the relative proportion of overhead costs has risen. This distortion of costs can result in inappropriate decision making. ABC is therefore an alternative approach to the traditional method or arbitrary allocation of overheads to product, services and customers.

(TCO 3) Patrick Ross, the president of Ross’s Wild Game Company, has asked for information about the cost behavior of manufacturing overhead costs. Specifically, he wants to know how much overhead cost is fixed and how much is variable. The following data are the only records available:

It was the first product line developed by Wilkerson and its high quality brought it a loyal customer base. Even if several competitors could match Wilkerson’s quality in valves, none had tried to gain market share by cutting price. Therefore the competitive situation for valves was not so fierce that Wilkerson could maintain its gross margin.

Traditional costing is an easily implemented costing method that aligns with generally accepted accounting principles, GAAP. Traditional costing is the distribution of manufacturing overhead costs across the number of products produced based or another volume based metric. Traditional costing is very simplistic in the fact that it doesn’t allocate out any nonmanufacturing costs. Traditional costing allocates costs to generic buckets such as direct material, direct labor and other overhead. Activity based costing (ABC) was developed as a costing method to overcome the weaknesses of traditional costing. ABC allocates costs to every activity, or manufacturing task, associated in the production of an item. ABC is more accurate than traditional costing. Competition Bikes grouped the following as tasks associated with the manufacturing of bicycles; Factory Setups, Quality Control, Engineering Service, Product Movements, Utilities, and Depreciation. (Johnson, n.d.)