The Wilkerson case is an excellent instrument to test your understanding of the main concepts of Activity Based Costing (ABC). Note from chap 6 in the book that direct costs such as direct labor expense (DL) and direct materials expense (DM) are directly traceable to products so they don't need to be allocated. But Manufacturing Overhead (MOH) is an indirect cost and needs to be allocated to products according to an allocation rate (see Step 5 in chapter exhibits 6-1 and 6-3). In the simple cost accounting system currently in use at Wilkerson, the basis for allocating the MOH is a percentage of direct labor cost (DL$). From case exhibit 1, we see total MOH to be allocated is $806,000 and DL$ = $271,250. The MOH rate is = 806000 / 271250 = 2.97 or 300% (rounding). This MOH rate means: for each direct labor dollar used in a product, the company allocates $3 to cover the estimated MOH associated with this product. You can confirm this in case exhibit 2: for valves, direct labor cost is $10, so MOH is allocated at 300% or $30; for pumps, DL$ is $12.50, so MOH = $37.50, etc. If the company implements ABC, the first step is to calculate budgeted indirect cost rates (as in step 5, chapter exhibit 6-4). Youll need to identify the activities that consume MOH resources, the total budgeted indirect costs for each activity (step 4 in chapter exhibit 6-4), the budgeted quantity of cost-allocation base (step 3), then compute the budgeted indirect cost rate or MOH rate for each activity. The two questions at the end of the case are too general and make it difficult to get started on your analysis. Instead of the two questions at the end of the case, follow these questions I prepared to guide your analysis: 1. Build a table for Wilkerson similar to chapter exhibit 6-4. Show, for each activity, the cost hierarchy category, the total budgeted indirect costs, the budgeted quantity of cost-allocation base, the budgeted indirect cost rate and explain the cause-and-effect relationships between the cost allocation base and the activity cost. Note: even though the book shows General, Selling & Administrative expenses allocated to products, in most situations this is not recommended because these tend to be facility-sustaining costs. 2. Using the budgeted indirect cost rates you calculated for question 1, allocate the MOH to the three product lines of valves, pumps and flow controllers based on the operating statistics from case exhibit 4. TIP: allocate the MOH to the total units in each product line, do NOT try to allocate per unit of product, leave that for question 3. 3. Build a table for Wilkerson similar to chapter exhibit 6-5. Instead of two product lines (simple lenses and complex lenses) Wilkerson has three product lines; direct costs are just DL and DM; and there are several indirect cost of activities (MOH). Show total costs per product line and per unit. 4. Compare the simple costing system using the 300% single indirect-cost pool currently in place at Wilkerson with a proposed ABC system. You may use chapter exhibit 6-6 as a template. What caused such large differences in cost estimates from the simple costing system to ABC system? 5. Calculate the profitability of each product line using the simple costing system and the ABC system (you will need actual prices from case exhibit 2).Which product line is really most profitable? Under the simple costing system, which product lines were undercosted and overcosted (see discussion on pp. 207-208 of textbook)? 6. What recommendations do you have for Wilkerson to increase product gross margins? Offer suggestions for prices of the product lines and possible cost reduction strategies.