Activity-based costing Essay

on that point be many different types of represent governing bodys a company can choose from when calculating their speak to. ii of the most frequently used cost accounting systems are a volume base cost system and an activity ground cost (ABC) system. Each system has their own advantages and disadvantages and some are to a greater extent common among certain industries. Wilkerson, like many other companies, used a simple/volume establish cost accounting system. Under this system, Wilkerson was inappropriately allocating their cost by assigning the overhead expenses based on direct labor, thus calculating their total be and operating income incorrectly.If Wilkerson continues to operate their company ignoring the fact that their costs are inaccurate, it is possible that they whitethorn make poor business and set decisions in the future. Although Wilkersons costs are currently being calculated incorrectly, if they decide to use an activity based costing system, they may achie ve more accurate results.Using a simple cost accounting system is often easier and less time consuming than an activity based costing system, but it is also less accurate. Wilkersons implementation of an ABC system would most likely be very beneficial to the company in terms of both determining their costs more precisely and making overall better pricing and business decisions. An ABC system at Wilkerson would look very different than their current volume based system. Wilkersons ABC system would use machine-related expenses, setup labor cost, receiving and production control, engineering, and packaging and shipment as the cost pools.The revised per unit product costs under this system would be $46.17/valve, $58.20/pump, and 115.38/flow restrainer and the margins would be 46.3%, 33.1%, and -9.9%, respectively. The results when calculating product costs are so different depending on the cost system because we are now actually determining the costs per unit with multiple cost pools because each preference uses a different amount of the indirect resources rather than assigning the manufacturing overhead cost solely based on the direct labor costs.Based on this new accounting information I would press that Wilkerson try to make an improvement in their flow controller product. Since the gross margin for this line is negative, if adjustments are made but there is no improvement in its profitability, I would tell Wilkerson to consider displace the line completely. Although Wilkerson would lose $420,000 in sales, their costs would be reduced by more than this amount, ultimately increase overall profits for the company. Unfortunately, there are some limitations in our analysis of Wilkersons alternative cost systems.One limitation is that we are unable to easily assess how the market will react to a change in the flow controller line. A second limitation that we have to consider when sounding at our analysis is that although our cost allocations are much more accu rate than before, these costs are close up the averages for each product, which could impact how accurate we are in determining the costs. However, if we are able to look last(prenominal) these limitations, our analysis of Wilkerson is beneficial in shaping how the company can more accurately calculate costs as well as be more profitable in general.