Case: Wilkerson Company
In the case, we have review the allocation of overhead by using Traditional Cost Accounting (TCA) and Activity Based Costing (ABC) in a manufacturing company named Wilkerson. Through the case study, I have learnt the importance of Cost Accounting System, the principles of TCA and ABC, the advantages and disadvantage of ABC, the practical use of ABC and cost reduction using ABC.
1. Importance of Cost Accounting System.
Through the case study, I learnt that a proper Cost Accounting System is very important in a company. Without the accurate system, a company is unable to maximize the profit from the product sold. The product price might be charged too high (over-priced) or too low (under-priced). All these will eventually affect the profitability and revenue as it is actually ...view middle of the document...
The TCA method assumes that all products indirect cost is only driven by one cost driver which is number of direct labour. The allocation of the indirect cost will be distributed following the ratio of the direct labour in production. Whereas in ABC method, it divided the indirect cost to several cost drivers based on the activity that the product was produce, from the incoming of the raw materials to outgoing shipment. For example of the activities are incoming receiving, machining, setup time, packing and shipment. After this, the indirect cost will be calculated based on the frequency or resources need for each of the product
Overall Wilkerson faces declining profits
•Market behaviour does not fit with product profitabilities suggested by current cost system
–No price competition despite high margins on commodity valves product
–Downward price pressure on commodity pumps product despite already low margins
–Demand unchanged by 10% price rise for customised flow controllers despite high margins
•Exhibit 1 shows total overheads are 111%
of total direct costs.
–Burden rate is 300% of direct labour
Q1 Calculate ABC product costs•First identify cost pools and activity drivers•Exhibit 1 shows 5 overhead cost pools•Total overhead / activity driver = traced costCost pool from Exhibit 1ActivityActivity DriverSource1. Machine-related expensesMachine operationMachine hours(note 1)2. Setup laborSet upsProduction runs(note 2)3. Receiving and production controlInventory movementsProduction runs(note 3)4. EngineeringSpecific workEngineering hoursExhibit 45. Packaging and shippingPackingShipments(note 4)Cost poolsExhibit 1Cost poolExhib. 1Act. driverExhib. 4Traced cost1. Machine-related expenses336,000 11,200 30 2. Setup labor40,000 160 250 3. Receiving and production control180,000 160 1,125 4. Engineering100,000 1,250 80 5. Packaging and shipping150,000 300 500