Wilkerson & Co case

V Pavan Kumar Reddy Section B 2020PGP466

a. On what counts the three products of Wilkerson are different?

Although the process is same for all the 3 products, i.e, pumps, valves and Flow controllers, the
margin for all the products was different. Wilkerson was the market leader in pumps. Due to the
reduction in price of pumps due to competition, the gross margin was reduced to 19% from 35%.
There was so much variety in types of flow controllers and they are customized. There was very less
impact of competition on flow controllers and the gross margin went up to 40% from 35%. All the 3
products are also different in terms of labour and material costs, machine hours required, and the
manufacturing overhead costs

c. Why are cost estimates different?

Activity based costing considers multiple cost drivers for each product whereas traditional costing
considers only a single cost driver

d. What limitations does the ABC estimates have?

• Although, the flow controllers are customized, these costs are estimated by considering the cost
of all the flow controllers are similar

• General and Admin. Expenses are not considered while deciding the unit costs of the products
Activity based costing
Manufacturing Activities (Exhibit: 1) Cost drivers (Exhibit: 4)
Machine related expenses $ 3,36,000 Machine hours 11200
Setup labor $ 40,000 Production runs 160
Receiving and production control $ 1,80,000 Production runs 160
Engineering $ 1,00,000 Hours of engineering 1250
Packaging & shipping $ 1,50,000 Number of shipments 300

Cost driver rate

Machine related expenses $ 30 /machine hour
Setup labor $ 250 /run
Receiving and production control $ 1,125 /run
Engineering $ 80 /hour
Packeging & shipping $ 500 /shipment

(Exhibit: 3 Valves Pumps Flow controllers

& 4) Production (units) 7500 12500 4000
Machine hours 3750 6250 1200
Production runs 10 50 100
Number of shipments 10 70 220
Hours of engineering 250 375 625
Mahine hours per unit 0.5 0.5 0.3

Valves Pumps Flow controllers

Direct Direct labor $ 10.00 $ 12.50 $ 10.00
Costs Direct materials $ 16.00 $ 20.00 $ 22.00
Machine related expenses $ 15.00 $ 15.00 $ 9.00
Total Setup labor $ 0.33 $ 1.00 $ 6.25
Overhead Receiving and production control $ 1.50 $ 4.50 $ 28.13
costs Engineering $ 2.67 $ 2.40 $ 12.50
Packaging & shipping $ 0.67 $ 2.80 $ 27.50
Total cost $ 46.17 $ 58.20 $ 115.38

Valves Pumps Flow controllers

Standard Traditional costing $ 56.00 $ 70.00 $ 62.00 (Exhibit:2)
Unit Costs Activity based costing $ 46.17 $ 58.20 $ 115.38