Question

Wilkerson Case

Would an activity -based costing system be better suited for Wilkerson than the costing system they now have? Explain.

Answer 1

Yes ABC be better suited for Wilkerson than Costing system because :

• Activity-based costing allows tracing indirect costs to product with a high degree of accuracy. While volume-based costing is implicitly based on an assumption that there’s a direct relationship between volume of production of individual products and level of overhead, activity-based costing allows finding individual relationships between volume of production and different overheads
• It becomes possible due to combining overheads into cost pools and allocating these cost pools to products in proportion to selected cost drivers that reflect these individual relationships between volume of production and level of overheads.
• Wilkerson should pool overheads into five groups (cost pools): machine-related expenses, setup labor cost, receiving and production control, engineering, packaging and shipment. The next step is choosing most appropriate cost drivers that reflect the relationship between volume of production of individual products and level of overheads.
• Machine hours are the most natural cost driver for machine-related expenses. Both setup and receiving, and production control activities are changed in proportion to number of production runs.
• Engineering cost can be allocated in proportion to hours of engineering work, whereas packaging and shipment activity is driven by the number of shipments.
• Activity-based costing provides more accurate information about product cost and, therefore, their gross margins.