Compan

CASE 4
y
PREPARED BY:
MUHAMMAD SYAHMI BIN ABD JALIL
213829
MOHAMAD FIRDAUS BIN YAHAYA
221524
SYAIMAA BINTI SAAD
221958
NORAZERA BINTI ALIAS
223915
NUR AQILAH BINTI AB AZIZ
223996

213829

EXECUTIVE SUMMARY
President

Wilkerson
Company

Controller
Manufacturing Manager

Problem

Declining profit Margin

Simple Cost Accounting
Plan ABC

Plan To Be
Implement

Plan Kaizen
Plan lean Manufacturing

223996

High
Overhead
Cost

Low
Profit
Margins

 Pricing method not realistic

High proportion of overhead costs

Not consider the different

activities performed

High
Overhead
Cost

 The

lower prices for pumps has

direct relationship
Low Profit
Margins

big impact to the company

Dropped

their pre-tax margin

& gross margins

221958

CAUSE
High overhead costs
The direct cost is calculated based on the
standard rate of material and labor but the
manufacturing overhead cost is allocated
based on 300% of labor cost.

Product

Units
Direct Labor
Direct Material
Total Direct
Cost
Overhead costs
(300% of DL)
Total Cost

Valves
($)

Pumps
($)

Flow
Controllers
($)

Total ($)

7,500

12,500

4,000

24,000

75,000

156,250

40,000

271,250

120,00012,500
250,000
x ($12.5088,000
x

458,000

300%)

195,000

406,250

128,000

729,250

225,000

468,750

120,000

813,750
(Actual 806,000)

420,000

875,000

7,500 x ($10 x
300%)

1,543,000
4,000
248,000x ($10 x
(Actual 1,535,250)
300%)

Reduction of pumps price

Parker had seen no alternative regarding the
competitors price, they reduce the prices in
order to remain competitive and maintain the
volume.
Price cuts had led to declining company profits,
especially in the pump line.
Refer Exhibit 2.

Loss of competitive advantage

Since many competitors were exists,
Wilkerson not yet hold a title as a major
pump supplier,
Competitors always tackled with market
price that caused the profit for Wilkerson
declined when they do the same thing.

223915

ALTERNATIVE SOLUTION

Step 1 : Identify & Analyse

COST

Machine-related
Labor
Engineering
Shipment

Step 2 : Assign and match

ACTIVITY

Cost per machine hour

Cost per production run
Cost of Cost per shipment

COST
OBJECT

Step 3: Total Up all cost

Find the rate per unit @ per production

Actual
Cost
Unit

Find the rate overhead cost by details

Total Costs
Units
346,250
461,500
7,500
4,000

727,500
12,500

100 % - Total Costs

Actual Prices
46.17
86

58.20
87

115.375
105

 Monitoring products from the moment they enter the design

phase and onward throughout their product life cycles.

Wilkerson Company can used target costing in order to

ensure that the company achieve the planned gross margin
which 35%. Formula for target costing is:

TARGET COSTING = MARKET PRICE DESIRED PROFIT

MAXIMUM
COST

Total Cost

$ 56.00

$ 70.00 $ 62.00

DIFFERENTIATION

221524

Activity-Based
Costing

Simple Cost
Accounting System

Activity-Based Costing

ABC properly divide the activity-related costs in a

proper way.
ABC divide major expenses in a more justified
manner and hence will present a clear picture of the
prices.

Cont..
ABC works best in complex environments, where
there are many machines and products, and tangled
processes that are not easy to sort out.

Conversely, it is of less use in a streamlined

environment
abbreviated.

where

production

processes

are

Traditional Volume-Based Costing

Product

ABC Costing

Valves

Pumps

Flow
Controller
s

Valves

Pumps

Flow
Controllers

7,500

12,500

4,000

7,500

12,500

4,000

$56.00

$70.00

$62.00

$46.17

$58.20

$115.375

Planned Gross
Margin

35%

35%

35%

35%

35%

35%

Target Selling
Price

$86.15

$107.69

$95.38

$71.03

$89.54

$177.50

Actual Selling
Price

$86.00

$87.00

$105.00

$86.00

$87.00

$105.00

Actual Gross
Margin

34.9%

19.5%

41.0%

46.3%

33.1%

-9.9%

Unit
Total Cost

DIFFERENTIATION

Traditional < ABC

Traditional < ABC Traditional > ABC