Analysis

The situation of competition is likely to vary for the products of Wilkerson Company. For instance, flow controllers, as well as pumps, lies on entirely different sides of the analysis spectrum. Pumps are goods; however, they are produced in greater concentrations and volumes for high price market competition. Unlikely, flow controllers are customizable products that supplied in markets with low competition and compromising demand at the current range of price. The third product is valves, and it is a standard item in production and shipment forms. Wilkerson Company is the leading quality producer in its production field, but the fate of its leadership depends on the number of uprising competitors. Moreover, the potential and existing completion value, the company should analyze its overhead costs since no cost-cutting assets are remaining in its supply chain and demand.

Wilkerson is currently speeding its attention to costing volume. The labor alongside direct material costs depends on materials and labor rates’ set prices. Therefore, indirect overhead costs are associated with direct labor costs at a 300% rate. So, volume-based costing may not result in a sufficient unit cost estimate due to the two factors. Because the overhead is high to the direct labor cost by 300%, also in consideration to the indirect capital consumption the Wilkerson’s products may tend to vary. There is a higher unit cost for the flow controllers since pumps and valves are standard products while flow controllers are customizable commodities. The available volume-based costing with a provision of single-stage indirect cost perhaps fails to differentiate indirect cost from products of direct labor costs.

For short-term decision making, direct costing, as well as contribution analysis, are acceptable. In addition to that, in price competition an awareness of the product’s minimum break-even point is crucial. Apart from this, unreliable information will be received for decision-making using direct costing when there are a significant increase and variation of overheads among the produced products. Another available option is activity-based costing. It allows accurate tracing of the indirect costs. However, activity-based costing entirely depends on the assumption there is a significant direct relationship between the production volumes of individual products and overhead level.

Thus, Wilkerson should group the existing overheads into five categories: receiving and production control, engineering, expenses related to machine, packaging, and cost of labor as well as shipment. The following step is to identify the active cost drivers showing a significant relationship between productions, specific products alongside overhead level. The table below indicates drivers, calculated driver rates and designated cost pools.

Cost per unit product can be used to calculate the sum of direct costs of material and labor as well as assigned overheads. The individual cost driver rate is multiplied by the driver cost volume for each product; the resultant is divided by the production volume of the product as shown below;

This mode of costing shows an accurate representation of product costs’ information as well as the gross margin of the product. It can be deduced that the customized product (flow controllers) are comparatively less attractive as compared to the standardized products (valves and pumps). The flow controllers produce a negative gross margin whereas valves and pumps are highly profitable as shown below;

For sustainability, Wilkerson should decrease costs of commodities such as pumps and valves due to their higher margins; however, the issue must be handled with negative profitability of flow controllers. The cost of each product alongside the decision of full cost analysis can be significantly affected by the different variations of the capacity consumption. Unfortunately, the demand may increase in some months, but Wilkerson can still realize it. Through the increase in the company’s level of capacity consumption, therefore cost analysis for each product should be used for capacity only. The capacity consumption level can be differentiated from the firm’s profit together with general and administrative costs.

Despite the rising limitation during calculation of cost divers as well as product cost, it does not portray the variation between each flow controllers even though they are customized products. So, the unit costs are varying upon the production cost or delivery cost and specific configuration. Consistent analysis of profitability of individual product based on its activity is expensive leading to an impossibility to include volume variability of products on unit costs. Therefore, we assume that there is a continuous cost of resources for the specific time and the calculations are done on a particular monthly basis.

Recommendation

The cost analysis should move from traditional volume-based costing to activity-based costing depending on the variability of products in increased demand for indirect capitals, increased level of overheads alongside relationship absence between activity volume and production volume

The company should review its policies about the flow controllers since there is no price competition Wilkerson should customize the product nature and review the process of each flow controllers to obtain a reasonable profit margin. Thus the prices must be set in line with the rate of the resource consumption by each customer or product.