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Submitted By acc1292
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Pages 3
Anna Chamandy
BMGT321
Professor Cheng
February 24 2016 Wilkerson Case

Currently, Wilkerson operates under a simple job-costing accounting system. It accounts for distinct cost objects. For example, it produces unique and different products for its customers such as valves, pumps and flow controllers. Direct material and labor are directly charged to the product (based on production units) and indirect overhead costs are allocated using one cost pool, direct labor production run time at 300%. The problem with this simple cost accounting system is that the products they make consume a different amount of indirect resources. For example, the flow controllers require more components and more labor and there is more variety in the types of flow controllers used in the industry. So we would expect unit costs for this product to be the highest among valves, pumps and flow controllers but in Exhibit 2 the standard unit cost is $62 compared to $70 for the pump. The pumps are a commodity product and produced in high volume. Pumps are subject to price competition, which is why Wilkerson has no choice, but to lower its prices for pumps leading to decreased margins of 3%. In order to change reported income, Wilkerson should use more a more accurate costing system, also known as Activity Based Costing (ABC).
Under an ABC costing system, Wilkerson will have several indirect cost pools that will be traced to each product rather than one. ABC will improve the accuracy of pricing the products and will change the current book income. Overhead should be split up into five cost pools: machine related expenses, setup labor, receiving and production control, engineering, and packaging/shipping. Next Wilkerson should link specific cost drivers most related to the overhead cost pools. For example, machine related expenses should use the cost driver machine hours as its cost

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