Wilkerson Company Case

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

Same equipment and labour were used for all the three products i.e. Valves, Pumps and Flow Controllers. The differences are listed below in a
table format. The products were produced to match customer shipping requirements.

Valves Pumps Flow Controllers

Components 4 different 5 components, but 10 components and
components, similar more labour
machined manufacturing compared to Valves
automatically process like valves and Pumps
Type of Product Standard, produced Shipped to Industrial More variety,
and shipped in large Product Distributors therefore more
lots production runs and
shipments
Market Higher Quality, Forced to match Prices recently were
Performance competitors did not prices of raised by 10%, this
engage in price competitors, Gross did not cause any
cutting, gross margins fell below change in Demand
margins maintained 20% (Company
at 35% planned for 30%)

b. Estimate the cost of three products as ABC method.

Exhibit 1: Operating Results

Sales $ 2,152,500.00
Direct Labour Expense $ 271,250.00
Direct Materials Expense $ 458,000.00

Manufacturing Overhead
Machine-related Expenses
Set up Labour
Receiving and Production Control
Engineering
Packaging and Shipping
$ 336,000.00
$ 40,000.00
$ 180,000.00
$ 100,000.00
$ 150,000.00

Total Manufacturing Overhead $ 806,000.00

Gross Margin $ 617,250.00 29%

General, Selling & Admin Expense $ 559,650.00

Operating Income (pre-tax) $ 57,600.00 3%

Exhibit 2: Product Profitability Analysis (March 2000)

Valves Pumps Flow Controllers

Direct Labour Cost $ 10.00 $ 12.50 10
Exhibit 1: Operating Results

Sales $ 2,152,500.00
Direct Labour Expense $ 271,250.00
Direct Materials Expense $ 458,000.00

Manufacturing Overhead
Machine-related Expenses
Set up Labour
Receiving and Production Control
Engineering
Packaging and Shipping
$ 336,000.00
$ 40,000.00
$ 180,000.00
$ 100,000.00
$ 150,000.00

Total Manufacturing Overhead $ 806,000.00

Gross Margin $ 617,250.00 29%

General, Selling & Admin Expense $ 559,650.00

Operating Income (pre-tax) $ 57,600.00 3%

Exhibit 2: Product Profitability Analysis (March 2000)

c. Why are cost estimates different?

The first estimate used is Traditional Costing method, which allocated the indirect costs as a percentage of labour costs. It did not take into
account the differences in producing the three different products but rather pools the indirect costs and allocates it to all products. In the ABC
method, every indirect cost is distributed according a criteria (mentioned in the above table) amongst the products. Therefore the cost estimates
for each product differ.

d. What limitations does the ABC estimates have?

Despite being one of the more accurate methods of cost estimation,

 ABC is harder to implement and more resource and time consuming.
 It requires more data to calculate which may not be readily available
 It may not be as widely accepted as Traditional Costing methods