Accounting Practice Essay
Team Assignment 2 1. Describe Wilkerson’s existing cost system and develop a diagram to show how costs flow from factory expense accounts to products. Currently, Wilkerson uses a volume-based costing. The direct labor cost, material cost and the overhead are allocated to the products as the variable cost. The overhead use a proportion to the products’ direct labor cost at a rate of 300%. Account Payable xx (1) Row Materials xx xx Work-In-Process xx xx (10) xx xx Finish Goods and Inventory (10) xx xx (11) Cost of Goods Sold xx (1) 2) (2) (3) (9) (11) Cash or Other Payable xx (4) xx (5) xx (6) xx (7) xx (8) Wage Payable xx (3) (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) Purchased Materials Direct Material Cost Direct Labor Cost Setup Labor Machine-related Expense Receiving and Production Control Engineering Packaging and Shipping Manufacturing Overhead Accumulated product cost Cost After goods sold Manufacturing Overhead (4) xx xx (9) (5) xx (6) xx (7) xx (8) xx Figure 1 Production Cost Flow 2. Develop an activity-based cost model using the information in the case.
Provide your best estimates about the cost and profitability of Wilkerson’s three product lines. To develop the activity-based cost model, we need to figure out the activities and assign manufacturing overhead resource costs to activity cost pools, then to assign cost from activities pools to cost objectives. The following table shows the activities, the activity cost and the unit activity rates. Table 1 Detail of unit activity rates Activities Machine-related expenses Setup labor Receiving and production control Engineering Packaging and shipping
Total Activity Aactivities Unit Activity Cost Quantity Rates Activity Cost Drivers $ 336,000 Machine hours 11200 $ 30 $ 40,000 Production run 160 $ 250 $ 180,000 Production run 160 $ 1,125 $ 100,000 Hours of engineering work 1250 $ 80 $ 150,000 Number of shippment 300 $ 500 We also can find the volume of cost objective and the volume of production of each product from the material. To assign costs from activity to the cost objective on the basis of the cost objective’s volume, we can use the volume of cost objective to multiply the unit activity rates and then divided by the amount of production of this product.
After that we can calculate the total overhead per unit for each product. Then add them with the direct cost to get the total cost per unit for each product. The results are shown in the following table. Table 2 Detail of total unit cost of Wilkerson’s three product lines Direct material cost Direct labor cost Total direct cost Machine hours Production run Hours of engineering work Number of shippment Total overhead Total unit cost Valves $ 16. 00 $ 10. 00 $ 26. 00 $ 15. 00 $ 1. 83 $ 2. 67 $ 0. 7 $ 20. 17 $ 46. 17 Pumps Flow Controllers $ 20. 00 $ 22. 00 $ 12. 50 $ 10. 00 $ 32. 50 $ 32. 00 $ 15. 00 $ 9. 00 $ 5. 50 $ 34. 38 $ 2. 40 $ 12. 50 $ 2. 80 $ 27. 50 $ 25. 70 $ 83. 38 $ 58. 20 $ 115. 38 The following table shows us the profitability of each product. Table 3 The cost and profitability of Wilkerson’s three product lines Actual selling price Total unit cost Actua gross margin Valves $ 86. 00 $ 46. 17 46. 32% Pumps Flow Controllers $ 87. 00 $ 105. 00 $ 58. 20 $ 115. 38 33. 10% -9. 8% 3. Explain the difference in the costs of the current cost system versus the ABC costs. The current cost system is volume-based costing system. Direct labor cost and direct material cost for three products are based on the actual rates; manufacturing overhead is 300% of direct labor cost. The Activity-based costing system, director labor cost and direct material cost for three products also are based on the actual rates; the difference is the way to calculate the manufacturing overhead.
First, using the activity cost pool and cost driver to get the cost driver rate for five cost pools: machine-related expenses, setup labor, receiving and production control, engineering and packaging and shipment; because each products has the actual cost in five cost pools, then using the rate above multiply by actual cost of each products to get the total cost. 4. Based on the analyses of questions 2 and 3, what actions might Wilkerson’s management term consider to improve their profitability?
Based on the analyses of questions 2 and 3, the Wilkerson’s management term should consider: if on market there is no price competition and no price inelastic demand, Wilkerson should set of action that change the price to fit the amount of individual product or customer’s consumed resources; in there is a price competition or price inelastic demand, Wilkerson should set of action reduce the cost of flow controller, because the margin of flow controllers at actual usage is negative. There are several ways to reduce the flow controller, such as using new materials, redesigning, or increasing production efficiency.