Essay About Product Costs And Direct Cost Data

Wilkerson 1
3. The product costs for valves, pumps and flow controllers estimated using Activity Based Costing for overhead activities and direct cost data are as follows:- For the valves the total variable costs are $195,000, the total fixed costs are $149,990 and the ABC cost per unit is $46.- For the pumps total variable costs are $406,250, the total fixed costs are $316,501 and the ABC cost per unit is $58.- For the flow controllers the total variable costs are $128,000, the total fixed costs are $339,507 and the ABC cost per unit is $116.4. For the Activity based costs as shown in exhibit (2) below, are mostly manufacturing overhead costs such as machine-related expenses, set up labor, receiving and production control, engineering, packaging and shipping. In comparision to the standard unit costs which are direct labor and direct material costs as shown in exhibit 2 of the case. As shown in exhibit (5), the percentage change differences in comparision with Standard Unit Cost and Activity based Cost for valves, pumps and flow controllers are  -18%, -17% and 89% respectively. “Allocation systems traditionally pool according to different departments and allocate the pool costs of the different departments to the cost object using volume variety and cost drivers such as units, volume, sales etc. Activity based costing systems usually pool the costs by acitivty centers and then allocate the activity center pool cost to cost objects by different volume and ABC cost drivers” (Edmonds, 2014). By using more activity centers to assign the indirect costs, ABC method can be used to improve cost tracing by analyzing the cause and effect relationships related to different activities. In the Acitivity based Costing method, the overhead cost total did not change in comparision with the standard unit cost method. The overhead costs were distributed variously across the valves, pumps and flow controllers. By using the ABC method, managers would get more informed data, which would yield to making overall better management decisions and increase business.6. In the case study, the initial assumptions were flawed for the Wilkerson case with the Standard unit cost method. By using the Activity-based Costing we were able to allocate the appropriate overhead costs to each of the products: valves, pumps and flow controllers. By adopting the ABC method, it was clear that the Flow controllers were not profitable given the gross margin % was -11.3% in comparision to the other products (exhibit 3). The decision to improve the flow controller unit needs to be made alongside of increasing the sales of the other profitable products: valves and pumps. Since valves have the biggest margin % at 46.5%, it would make sense to use that product to increase sales and capture more market share. I would recommend to price all products above a profit margin of 10%. The financial implications for my recommendations would be to raise the flow controller price, reduce the variety of flow controllers product, set up a minimum quantity on orders which would reduce packaging and shipping costs. By following these recommendations, I believe the gross margin % could be drastically improved form the original -11.3% to breaking-even and becoming profitable by staying competitive in the market. Disadvantages based on the recommendations would be price sensitivity risk and decreased demand related to market changes.