Management Accounting-- Wilkerson Company Case
The purpose of this report is discussing the case of Wilkerson Company that confronting tough competition in price cutting in pumps which caused to a big drop of pre-tax operating income from 10% to 3%. After observing the existing costing allocation, we found out there is an issue on the existing costing report that the manager could not be able to see the real situation. In light of this, there will be brought to the discussion on the feasibility of using an alternative costing method – Activity based costing (ABC) in the latter paragraphs.
The issue of misallocation cost
With the use of Traditional Absorption Costing (TAC) which means Wilkerson Company is now only put the costing of direct labor and material in place. As we can see
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The reason of going up is not because of increase in profit, but due to the re-calculating the cost and revenue by using different costing method which is relatively close to the reality. Therefore, ABC provides ‘visibility’ for managers who can understand the real costing in each manufacturing activities involved, they can establish clear-cut cause-and-effect relationships between activities and costs.
Table 5: Operating Result (March 2000) TAC ABC ($) ($)
Sales 2,152,500 100% 2,361,923 100%
Direct Labor Expense 271,250 271,250
Direct Materials Expense 458,000 458,000
Manufacturing Overhead 806,000 806,000
Gross Margin 617,250 29% 826,673 35%
General, Selling and Administration Expense 559,650 559,650
Operating Income (pre-tax) 57,600 3% 267,023 11%
For deep analysis of the distribution of overhead costs under ABC system, we can easily get the numbers of each costing activities which included direct labor and material costs, total manufacturing overheads and total cost allocation in each products. As we see Table 4 below, we discovered that the higher