What is the competitive situation faced by Wilkerson? Given some apparent proble

Question

What is the competitive situation faced by Wilkerson?

Given some apparent problems with Wilkerson’s cost system, should executives abandon overhead assignment to products entirely by adopting a contribution margin approach in which manufacturing overhead is treated as a period expense? Why or why not?

Prepare the following calculations. Create a table using Excel to show your answers with details support your answer. Be sure to use $ signs where appropriate. Copy and paste as picture into Word document.

Calculate the unit product cost for each product using the direct-labor-based cost allocation system.

Calculate the unit product cost for each product using activity based costing to allocate the cost of manufacturing overhead, as well as profitability for each product line. Overhead cost pools include machine, setup, receiving/scheduling, engineering support and packing/shipping products.

Compare your work in question 3a. and 3b. above. Why have cost shifts occurred?

Exhibit 1 Wilkerson Company: Operating Results (March 2000) Sales $2,152,500 100% Direct Labor Expense $271,250 Direct Materials Expense 498,000 Manufacturing Overhead     Machine-related expenses $313,600     Setup labor 32,000     Receiving and production control 192,900     Engineering 100,000     Packaging and shipping 150,000 Total Manufacturing Overhead 788,500 Total cost of goods sold 1,557,750 Gross Margin $594,750 28% General, Selling & Admin. Expense 559,650 Operating Income (pre-tax) $35,100 2% Exhibit 2. Product Profitability Analysis (March 2000) Valves Pumps Flow Controllers Direct labor cost $10.00 $12.50 $10.00 Direct material cost 18.00 22.00 22.00 Manufacturing overhead (@300%) 30.00 37.50 30.00 Standard unit costs $58.00 $72.00 $62.00 Target selling price $86.15 $107.69 $95.38 Planned gross margin (%) 35.0% 35.0% 35.0% Actual selling price $86.00 $87.00 $105.00 Actual gross margin (%) 32.6% 17.2% 41.0%

Explanation / Answer

Calculation of unit product cost using activity based costing

Statement of cost pool

Statement of cost sheet

Statement of profitability

Overhead Amount($)(a) Basis Number(b) Cost per activity($) (a/b) Machine-related expenses 313,600 machine hours 11200 28 Setup labor 32,000 production runs 160 200 Receiving and production control 192,900 productin runs 160 321.5 Engineering 100000 hours of engineer work 1250 80 Packaging and shipping 150000 Number of shipments 300 500

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