Managerial Accounting
Question 1:
The profits of Wilkerson Company have dropped drastically because of the severe reduction in prices of pumps by competitors. Wilkerson is greatly affected because pumps are the major product line of the company. This has forced the company to also reduce sharply its prices for pumps so as to keep up with the competition and attract customers. The net result for the severe price cutting move has been declining profits for the company. The stiff competition that Wilkerson Company is facing is due to the fact that other competitors are now able to match Parker’s quality in valves (Kaplan, 2003).
Question 2:
Considering the cost system problems that Wilkerson Company is currently facing, it is imperative that the executives should consider abandoning overhead assignment to products altogether. This should be done by taking up a contribution margin approach in which manufacturing overhead is regarded as a period expense. Adopting such a strategy will help Wilkerson to be at par with its rivals who do not allocate any overhead costs to their products but instead treat them as period experience and not product expense. Adopting the new strategy will help Wilkerson to measure its product profitability at the contribution margin level. In other words, all variable costs will be subtracted from the price (Kaplan, 2003). This is contrary to the current non-working formula used by Wilkerson, where direct material and direct labor are the company’s only direct variable costs. Therefore, Wilkerson it is time for Wilkerson company to play the game of some of its competitors by pricing to cover variable costs if it is to remain relevant and profitable going forth.
Question 3:
Wilkerson Company has always made use of a simple cost accounting system. Each unit of the company’s product is charged for direct material together with labor cost. The cost of material is based on the prices that are paid for the components as established in annual purchasing agreements of the company. The labor rates, which include fringe benefits of the company’s employees, are $25 per every hour, and are charged to products on the basis of the standard run time for individual product. In addition, the company had a single producing department where components are taken through the relevant machines and assembled into finished commodities. In this department, the overhead costs are placed on products in form of a percentage of production-run direct labor cost (Kaplan, 2003). Consequently, the rate is 300% at the moment. Given that it is a must for the direct labor cost to be factored in the factory payroll, this method is perceived as an economical way of allocating overhead costs to the products by the company.
Question 4
Flow Controller
Gross margin analysis of flow controller
Sales $420,000
Variable cost
Direct labor
Direct materials 40,000
Overhead 88,000
Machine related expenses $36,000
Set up labor 25,000
Receiving and production control 112,500
Packaging and shipping 110,000
Engineering 50,000
Total manufacturing overhead 333,500
Per unit cost under ABC
Products Direct costs Total overhead costs
Direct labour Direct material Machine related expenses Set up labour Receiving and production control Packaging and shipping engineering Total per unit cost
valves $ 16.00 $10.00 $15.00 $0.33 $6.25 $2.66 $0.67 $46.17
pumps $20.00 $12.00 $15.00 $1.00 $4050 $2.40 $2.80
Flow controllers $22.00 $10.00 $9.00 $6.25 $28.13 $12.50 $27.50 $111.38
The reported product costs and profitability is different from the cost assignment that I present The cost drivers are volume, charge and time, labor, cost of raw materials, and quantity of rejected output or waste.
Question 5:
In order to improve the profitability, the Wilkerson’s management team should consider taking the following actions. First, it should strive to increase sales without a big increase in promotion expense or advertising. This can be done through free publicity in its sales area, have a local industry expert to offer a free seminar, or only have salespersons that are sold on the company and its products (Kotler).
Secondly, Wilkerson should not do any further cost cutting. This is because excessive downsizing together with cost cutting is not healthy for the company anymore. To attract serious investors, the company will need to increase both top line (growth) and bottom line (profitability). Much focus should be directed to customer profitability as opposed to product productivity. Thus the company ought to find ways to give more value to customers so that there is increased return business.
Lastly, the management team of Wilkerson should make sure decrease its expenses. This could in the form of reduced personnel and/or inventory. Employees should be inspired to offer cost cutting ideas frequently and occasionally reward them with recognition.
Question 6
I am confident that the cost estimates I prepared in the answer to Question 4 will be able to yield expected result. However, for better cost and profitability estimates, there is need for further information or analysis. These include the company’s overheads expenses for the entire month, all material costs, total number of sales persons and the amounts paid to them according to the compensation plan, and the planned long-term expenses for the company.
Question 7:
Wilkerson Company is presently compensating its salesperson with commission on their gross sales volumes (less returns) meaning that salespeople are given a flat rate on the basis of the overall sales volume or the number of units they manage to sell.
The limitations of the current incentive plan of Wilkerson have made the company not realize its full potential. First, the company has less control over its sales representatives besides having less power over directing its other corporate objectives. Also, it is more likely than not than the troubles of the company have been contributed to by the nature of the straight sales compensation plan to have each salesperson being preoccupied with maximizing individual sales as opposed to pulling together and build working relationships not focused on short-term sales. Furthermore, it is likely that the sales volume of Wilkerson have dwindled because the straight commission plans are disliked by the salespeople themselves. This is because earnings under this plan are often unstable and unpredictable. At a time like this when business is not too good for the company because of stiff competition, the turnover rates are often high making the company to give draws advanced to the salespeople against future commissions. Unfortunately, the salespeople may have been unable to raise enough commissions to pay back the draws or quit if not being fired before the repayment of the draws. In this case, Wilkerson is left to incur the loss.
Accordingly, considering that the incentive system of compensating salesperson with commissions on their gross sales volume has not as good as expected, it is time Wilkerson Company to adopt another more suitable compensation plan for its salespersons. I would propose that the company considers adopting a combination of sales commission plans. This way Wilkerson will give both a base salary and an incentive on the basis of production. It will also help in avoiding the limitations presented by other plans. The salespeople will be given a stable salary which eases out the highs and lows while the company will have more ability of directing and rewarding its salespersons to do tasks not directly associated to short-term revenue. This revenue plan will greatly motivate salesperson to increase sales revenue and profitability. This plan can take the tiered structure to inspire top salespersons to deliver on an open-ended basis. As such, any revenues that salesperson bring in above their quota would translate to profitability of the company (Needles, 2010). Thus there is increased revenue and profit while the fixed expenses on wage along with benefits for the salespeople remain constant.
References:
Kaplan, S. Robert. (2003) Wilkerson Company. Retrieved on April 18, 2012 from: http://www.hbsp.harvard.edu.
Needles, E. Belverd, Powers, Marian, & Crosson, V. Susan. (2010). Financial and Managerial Accounting. Connecticut, Cengage Learning.
