Wilkerson Case

3. Wilkerson currently uses a traditional volume-based, full absorbing cost system. Each unit of product cost consists of direct material, direct labor, and manufacturing overhead costs which are allocated based on direct labor cost at a 300% rate. The factory cost flow diagram is shown below.

Total Manufacturing Overhead: 806,000 |

Total labor cost: 271,250 |

Manufacturing cost rate per labor cost: 300% |

| Labor cost per unit | | Manufacturing cost per unit |

Valves | $10.00 | $10.00*300% | $30.00 |

Pumps | $12.50 | $12.50*300% | $37.50 |

Flow Controllers | $10.00 | $10.00*300% | $30.00 |

| Valves | Pumps | Flow Controllers |

Direct Labor | $10.00 | $12.50 | $10.00 |

Direct Material | 16.00 | 20.00 | 22.00 |

Manufacturing Overhead | 30.00 | 37.50 | 30.00 |

Total cost | $56.00 | $70.00 | $62.00 |

However, Wilkerson has very high total manufacturing cost, and its three products have diverse consumption manners of indirect cost. Therefore, the traditional volume-based cost system is inadequate.

4. The ABC costing diagram is shown below.

Activity Pool | Machine related expense$336,000 | Setup Labor$40,000 | Receiving and production control$180,000 | Engineering$100,000 | Packing and shipping$150,000 |

Cost driver | Machine hour11,200 | Production run160 | Production run160 | Engineering hour1,250 | # of shipment300 |

Rate | $30/hour | $250/run | $1,125/run | $80/hour | $500/shipment |

Valves | $30*0.5 | $250*10/7,500 | $1,125*10/7,500 | $80*250/7,500 | $500*10/7,500 |

| $15.00 | $0.33 | $1.50 | $2.66 | $0.67 |

Pumps | $30*0.5 | $250*50/12,500 | $1,125*50/12,500 | $80*375/12,500 | $500*70/12,500 |

| $15.00 | $1.00 | 4.50 | 2.40 | $2.80 |

Flow controllers | $30*0.3 | $250*100/4,000 | $1,125*100/4,000= | $80*625/4,000 | $500*220/4,000 |

| $9.00 | $6.25 | $28.13 | $12.50 | $27.50 |

Cost per unit under ABC system：

| Valves | Pumps | Flow Controllers |

Direct Labor | | $10.00 | | $12.50 | | $10.00 |

Direct Material | | 16.00 | | 20.00 | | 22.00 |

Machine