Wilkerson Essay

1632 words - 7 pages

  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.  The  profitability  analysis   indicates   that   the   company   earns   healthy   margins   on   pumps   and   valves.   However,   the   margin   of   flow  controllers  at  actual  usage  of  capacity  is  negative.  Wilkerson  should  consider  action  targeted  at   cost   reduction   (changes   in   flow   controllers   design   or   in   their   ...view middle of the document...

  Analysis   Competitive  situation   The   competitive   situation   varies     and   flow   controllers   are   on   the   opposite   sides   of   the   spectrum.   Pumps   are   commodity   products,   produced   in   high   volumes   for   a   market  with  severe   price  competition.  Flow   controllers,  on  the   contrary,  are  customized  products,   sold  in  a  less  competitive  market  with  inelastic  demand  at  the  current  price  range.  The  third  product,   valves,   is   standard,   produced   and   shipped   in   large   lots.   Wilkerson   is   a   quality   leader,   but   this   leadership   may   soon   be   contested   by   several   competitors.   Although   they   are   able   to   match     are   no   signs   of   price   competition   yet.   Nevertheless,   in   the   long-­‐run   Wilkerson   should   be   prepared   to   compete   on   price.   Existing   (pumps)   and   potential   (valves)   price   competition  pushes  Wilkerson  to  analyze  its  overhead  costs,  since  no  reserves  of  cost  cutting  are  left   in  its  supply  chain  (both  customer  and  suppliers  agreed  to  just-­‐in-­‐time  delivery).  

Existing  cost  system   Currently   Wilkerson   implements   volume-­‐based   full   costing.   Direct   materials   and   labor   costs   are   based  on  standard  prices  of  materials  and  labor  rates.  Indirect  cost  (overhead)  is  allocated  to  cost   objects  (products)  in  proportion  to  direct  labor  cost  at  the  rate  of  300%.   Two  factors  demonstrate  that  volume-­‐based  costing  may  produce  inadequate  estimates  of  the  unit   cost:   Overheads  are  quite  high  (300%  to  direct  labor  cost).   Products   vary   in   terms   of   consumption   of   indirect   resources.   Pumps   and   valves   are   standard   products,  whereas  flow  controllers  are  customized,  so  we  should  expect  higher  unit  cost  for  the   latter.   Existing   volume-­‐based   costing   with   one-­‐stage   indirect   cost   allocation   (from   aggregated   with   their   demand   on   indirect   resources.     Currently   overheads   are   allocated   to   products   in   proportion  to  direct  labor  costs,  altho   Option  I:  Direct  costing  and  Contribution  analysis   Direct  costing  and  contribution  analysis  are  adequate  for  short-­‐term  decision  making  (e.g.  accept  or   reject  an  additional  order  when  only  those  costs  that  would  change  if  a  particular  option  is  taken  are   relevant).   In   the   long-­‐run   under   price   competition,   however,   the   company   needs   to   be   sure   that   each  product  is  at  a  minimum  break  even.   Besides,   direct   costing   would   provide   highly   unreliable   information   for   decision-­‐making   when   overheads  are  so  significant  and  there  is  variability  among  products.   Option  II:  Activity-­‐based  costing   Activity-­‐based  costing  allows  tracing  indirect...

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