Management accounting: Wilkerson Company is in the business of manufacturing valves, pumps, flow controllers etc. Severe industry wise price cuts in the pumps business, which is Wilkersons major product line, has badly affected the company

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Wilkerson Company


Wilkerson Company is in the business of manufacturing valves, pumps, flow controllers etc. Severe industry wise price cuts in the pumps business, which is Wilkerson’s major product line, has badly affected the company’s margins (Gross Margin of 19.5% as against a planned gross margin of 35%). On the other hand the flow controllers division was performing above the expected profits (yielding a Gross Margin of 41%, a value higher than 35% estimated). Wilkerson needs to identify the proper mix of its product line to regain its profitability. This is to be done based on information provided in the case, regarding pricing decisions, decision to discontinue or continue a product and product design.

A detailed analysis of the problems faced by Wilkerson Company is as follows.


Based on the operating results of March 2000, we see that the company has grouped its overheads into 5 cost items, as below:

  • Machine-related expenses
  • Setup labor cost
  • Receiving and production control
  • Engineering
  • Packaging and shipment

Current Method - Volume Based Costing

As per the given information, Wilkerson uses volume based costing system. Direct material and labor costs are based standard prices. Overheads are charged as 300% of the direct labor cost. This implies overheads are applied directly in relation to labor costs irrespective of relevance.

Table 1 - Margin Calculation for Volume Based Costing

Based on the volume based costing method we can clearly see that the Valves are performing within the planned margins, while Pumps are performing well below par (Gross Margin of 19.54% against expected 35%) and Flow controllers are performing above par (40.95% against 35%).

Such a costing methodology is adequate in the short run since the decision to accept or reject an order is based on the variable costs associated. However, in the long run, the decision to have a proper product mix is based on the performance and breakeven point of each product. Moreover since overheads are very high, they are significant contributors to decision making in this costing method. But they might end up giving unreliable information during decision making since in this method we directly relate the overheads to the products on the basis of percentage of product run direct labor cost. This method is not reliable since each product varies significantly in its overheads costs association and the basic assumption that a direct relation exists is wrong.

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Proposed Method - Activity Based Costing

Going forward, based on these groups, the company should choose the most appropriate cost drivers that reflect the relationship between the volume of production of individual products and the level of overheads. It can be said that ‘machine hours’ is the appropriate cost driver for the machine-related expenses cost pool and setup and receiving as well as production control activities are changed in proportion to number of production runs. Engineering cost is driven by hours of engineering work and lastly packaging and shipment activity changes in proportion to the number of shipments. ...

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