Cost Accounting Questions on Wilkerson Company Case Analysis
Wilkerson Company
1. What is the competitive situation faced by Wilkerson? The critical product in term of market competition is the pumps of Wilkerson Company. The pumps are Wilkersons major product line with a production of about 12,500 units per month. Pumps currently have the lowest gross margin among all products, because competitors had been reducing prices on pumps and Wilkerson adopted its prices in order to remain competitive and to maintain the volume. 2. Given some apparent problems with Wilkersons cost system, should executives abandon overhead assignment to products entirely by adopting a contribution margin approach in which manufacturing overhead is treated as a period expense? Our conclusion is, that they should not adopt a contribution margin approach, because we know that the current contribution margin of the major product (pumps) has a downward tendency and therefore the risk to generate a loss with the pumps is very high, because we know that there is a fast moving trend from production-run labor hours towards machine hours (automation) as well as an increasing tendency in shipping, packaging efforts. In general we can conclude that fixed costs are rising while the gross margin of our major product is shrinking. This is why we advise not to adopt a contribution margin approach.
3. How does Wilkersons existing cost system operate? Develop a diagram to show how costs flow from factory expense accounts to products.
The existing cost accounting system is based on a normal job costing system. The cost of purchased raw materials is recorded in the direct materials account, therefore either accounts payable account can be increased or cash account decreased. Raw materials are transferred into the work-in process account on the debit side and therefore deducted in the direct materials account. In the debit side of the WiP account – direct labor as well as MOH costs are debited as well (and in parallel credited on the direct labor account and
1. What is the competitive situation faced by Wilkerson? The critical product in term of market competition is the pumps of Wilkerson Company. The pumps are Wilkersons major product line with a production of about 12,500 units per month. Pumps currently have the lowest gross margin among all products, because competitors had been reducing prices on pumps and Wilkerson adopted its prices in order to remain competitive and to maintain the volume. 2. Given some apparent problems with Wilkersons cost system, should executives abandon overhead assignment to products entirely by adopting a contribution margin approach in which manufacturing overhead is treated as a period expense? Our conclusion is, that they should not adopt a contribution margin approach, because we know that the current contribution margin of the major product (pumps) has a downward tendency and therefore the risk to generate a loss with the pumps is very high, because we know that there is a fast moving trend from production-run labor hours towards machine hours (automation) as well as an increasing tendency in shipping, packaging efforts. In general we can conclude that fixed costs are rising while the gross margin of our major product is shrinking. This is why we advise not to adopt a contribution margin approach.
3. How does Wilkersons existing cost system operate? Develop a diagram to show how costs flow from factory expense accounts to products.
The existing cost accounting system is based on a normal job costing system. The cost of purchased raw materials is recorded in the direct materials account, therefore either accounts payable account can be increased or cash account decreased. Raw materials are transferred into the work-in process account on the debit side and therefore deducted in the direct materials account. In the debit side of the WiP account – direct labor as well as MOH costs are debited as well (and in parallel credited on the direct labor account and