Question

Wilkerson Case

Given some of the apparent problems with the Wilkerson's cost system, should the executives abandon overhead assignment to products entirely by adopting a contribution margin approach in which manufacturing overhead is treated as a period expense?

Answer 1

Current problems in the system by treating manufacturing costs as a period cost

• Manufacturing overhead is estimated bu multiplying direct labour with 300%. This estimation is not accurate and does not represent how the actual variable sub-costs that compose the MOH behave i.e. machine related expenses, setup labour, receiving and production control, engineering, packaging and shipping. Although there could be a relationship between the amount of direct labour cost and the total MOH, this current method of estimation is vague and disregards the actual components of MOH.

Advantage of Product Cost

• More precise reflection of the variability of the sources e.g. if there are five variables, it is more accurate than one.

Advantage of Period Cost

• Treating MOH as a period cost means that it remains easier to compare Wilkerson's with a competitor, provided that competitor also treats MOH as a period cost i.e. it is easier to compare like-for-like