Executive Summary Taking into account the difference among product and high proportion of overheads, Wilkerson should

abandon its existing cost system and move to activity-based costing. The profitability analysis indicates that the company earns healthy margins on pumps and valves. However, the margin of flow controllers at actual usage of capacity is negative. Wilkerson should consider action targeted at cost reduction (changes in flow controllers design or in their production and delivery process) or raising the price of flow controllers for customers. Since flow controllers are customized, the company can set different prices for different customers (groups of customers) based on the actual amount of resources spent (e.g. implement activity-based pricing). Problem Wilkerson has to estimate the profitability of its products in order to make long-term product mix decisions. These decisions should be based on estimation of product costs and might include decisions to continue / stop production of a particular product, pricing decisions, and decisions concerning product and process design, including customer relations. Information Information about direct labor and material costs as well as overhead costs is available. Overheads are recorded by five cost pools (machining, setup labor, receiving and production control, engineering, and packaging and shipment). We assume that the current month is typical in terms of (a) capacity utilization, and (b) cost of resources. Analysis Competitive situation The competitive situation varies for Wilkersons products. Pump and flow controllers are on the opposite sides of the spectrum. Pumps are commodity products, produced in high volumes for a market with severe price competition. Flow controllers, on the contrary, are customized products, sold in a less competitive market with inelastic demand at the current price range. The third..

Executive Summary Taking into account the difference among product and high proportion of overheads, Wilkersonshould abandon its existing cost system and move to activity-based costing. The profitability analysisindicates that the company earns healthy margins on pumps and valves. However, the margin of flow controllers at actual usage of capacity is negative. Wilkerson should consider action targeted atcost reduction (changes in flow controllers design or in their production and delivery process) orraising the price of flow controllers for customers. Since flow controllers are customized, thecompany can set different prices for different customers (groups of customers) based on the actualamount of resources spent (e.g. implement activity-based pricing).

Problem Wilkerson has to estimate the profitability of its products in order to make long-term product mixdecisions. These decisions should be based on estimation of product costs and might includedecisions to continue / stop production of a particular product, pricing decisions, and decisionsconcerning product and process design, including customer relations.

Information Information about direct labor and material costs as well as overhead costs is available. Overheadsare recorded by five cost pools (machining, setup labor, receiving and production control,engineering, and packaging and shipment). We assume that the current month is typical in terms of (a) capacity utilization, and (b) cost of resources.

Analysis Competitive situation The competitive situation varies for Wilkersons products. Pump and flow controllers are on theopposite sides of the spectrum. Pumps are commodity products, produced in high volumes for amarket with severe price competition. Flow controllers, on the contrary, are customized products,sold in a less...

. Management Accounting Course Assessment In the Wilkerson Company case study of Harvard Business School, the main issue that the company is facing lower pre-tax operating margin (3%) comparing to historical pre-tax operating margin of 10%. Currently, the company uses simple Overhead Absorption Rate (OAR) in its accounting system. After OAR is obtained through dividing the total manufacturing overheads by the total activity level; it is then charged to different products' unit cost based on the respective direct labor hour spent. The OAR obtained in this case study is 300%. Referring to Exhibit 1, with the fact that flow

controllers have better selling price since this product line is protected from market competiveness, it appears to have the highest actual gross margin of 41.0%; followed by valves (34.9%) and pumps (19.5%). The OAR reflects the company's major product line - pumps, to hold direct responsibility on the overall poor income performance, mainly due to its continuous price reduction to compete against the market. Conversely comparing the operating statistics in March 2000, the flow controllers recorded the least units produced and yet required the highest production runs, shipments and engineering works. This product line also being charged at low manufacturing overheads comparing to pumps, by reason of its low direct labor cost. Exhibit 1 Considering another accounting system, Activity-Based Costing (ABC) identifies the company's activities level and allocate respective costs based on workload and expenditure; assigning indirect costs to the products' direct costs. Thus based on the company's study on Wilkerson's overheads, ABC would be fair as the selected accounting system to identify the products actual costs, where the manufacturing overheads and other expenses are charged based on the relevant activities level showed in Table 1. Referring to Exhibit 2, the ABC has indicated that valves (46.3%) have the highest actual gross margin, followed by pumps (33.1%) and flow controllers (-9.9%). In fact, it is found that the flow controllers are having negative gross margin due to the extensive workload required to produce and deliver the products. The results for both systems have turned out to be totally different, whereby the flow controllers' product line in underperforming and should be increased in selling price. As for valves and pumps, the ABC actually proves that valves have achieved, while pumps almost achieve the targeted 35% gross margin. Table 1 Exhibit 2 Recently, Wilkerson Company has raised the price for flow controllers for more than 10%, and it is found that the decision does not affect