The Wilkerson Company provides products to manufacturers of water purification equipment, as demonstrated in the Wilkerson Case Study.
Wilkerson Company has a strong presence in the high volume pump, customized flow controller, and valve industry. All three product lines begin with procuring semi-finished components from various suppliers. The manufacturing process for pumps and valves is practically identical. However, flow controllers involve higher component and labor usage. The company currently implements volume-based costing at its production facility.
Wilkinson Company's current costing system presumes a correlation between production volume and overhead amount. Specifically, the company assumes an overhead cost three times the direct labor cost per unit. However, activity-based costing allows for a more accurate assessment of each overhead cost's relationship with production. For instance, the p
...resent system fails to consider individuals operating multiple machines simultaneously.
Exhibit 1 shows the costs for Wilkerson's new product under an activity based costing system. The costs are as follows:
- Valves - $46.17
Pumps cost $58.20, and Flow Controllers cost $115.38. According to Exhibit 2, the activity based costing system would result in gross margins of 46%, 33%, and -10% for these products. Valve and pump margins have gone up significantly, while Flow Controller's margin has dropped considerably.
The use of volume-based costing and activity-based costing can lead to significant differences in product cost outcomes. These differences arise from the way in which product costs are distributed among various product lines. As mentioned earlier, Wilkerson's Overhead...
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