Wilkerson Case

Wilkerson Company

A case analysis

XXXX Students

Considering Wilkerson’s competitive environment, production processes and current accounting system, what red flags do you see which may signal that the current cost system is distorting product costs (relate these specifically to the situation at Wilkerson)? Also discuss (using Wilkerson specifics) whether Wilkerson has the three necessary conditions for ABC to be helpful.

We believe Wilkerson would benefit from utilizing an ABC model in their allocation of overhead. Utilizing the current allocation base, they currently do not know their actual costs of manufacturing; therefore they cannot choose the correct strategic course of action. There are several red flags that signal the current cost system is distorting product costs at Wilkerson. First, the company has noticed that a recent 10% increase in the price of flow controllers has not impacted demand. Customers do not seem to be complaining about these price increases, implying that the product is priced too low in the marketplace. Second, the company can’t figure out how competitors can continue to reduce the prices on their pumps. As Wilkerson continues to cut their prices to compete on pumps, their margins continue to drop to below historical averages. Third, they believe the profitability of flow controllers, a more complex product to manufacture, is more than double the profitability of the more standardized pump product. Logically a more complex product should be more expensive to manufacture; however, their current volume-related cost allocation base has not accurately allocated the increased direct and indirect costs. Fourth, there have been major changes to Wilkerson’s operations, such as adding pumps and flow controllers, and yet Wilkerson maintained the same cost system. Finally, this volume-related allocation base, specifically production run labor hours, does not accurately assess all costs or even reflect their workers are often...