Case 5-4: Wilson Electronics

1
Case 5-4 Wilson Electronics

• Group II
• Aftab Usmani
• Alexander Derevin
• Carla Daniels
• Shantanu Kumar Singh

2
Wilson Electronics (A)

• Wilson Electronics builds components such as
  ducts, connectors and junction boxes used in
  power and data cable installation.
• Controller Mike Foster was key to taking the ABC
  initiative. Fosters system focused on the costs
  of creating capacity for each manufacturing step.
  Idle capacity was viewed as a cost to the
  company, not charged to the customers.
• Unfortunately, Mike Foster left the company.
• Bill Simms wanted the new controller Alice
  Johnson to show how ABC system will help make
  strategic decisions.

3
The Cost Accounting System

• The ABC model building process by Foster included
  the following
• Gathering activity definition, resource driver ,
  and activity data.
• Creating ABC model to show changes in product
  design on activity frequencies and, therefore,
  costs.
• Inputting data into the model.

4
A12 Junction box cost reduction proposal

• Alice wanted ABC to show cost reduction in the
  A12 junction box.
• In order to be competitive with other companies,
  A12 cost should go down by 0.40/unit.
• Proposal was made to substitute a new part in
  place of several old parts.
• Cost increase in parts because of this new
  assembly 1.00/unit .

5
The meeting

• Alice discussed her proposal with Sally and Ed.
• Sally used ABC model to show changes in activity
  frequency with new reduction in parts. Savings
  0.47/unit.
• Ed wanted to see real cost savings in terms of
  employee reduction. Tried to combine new idle
  capacity with existing one.

6

• Describe the position taken by Sally Jones.
  Prepare a new bill of activities for the revised
  version of the A12 junction box, based on the old
  bill of activities provided in Exhibit 3. How
  much cost savings per unit will be realized?
• Sally Jones used the ABC model to adjust the
  activity driver counts affected by the change in
  parts. Then, based on the ABC rates, she
  calculated the total ABC cost savings.
• Cost Savings/Unit 82.24 - 82.72 (0.47)
• Assumption The projects 10,000 upfront cost
  for product engineering work and 9,500 cost for
  process engineering work would be spread over
  many years to come. So they are not included in
  the current cost savings.

7
Capacity-based Approach

• How does the capacity based approach to
  designing an ABC system enable the measurement of
  changes in resource usage?
• Capacity based approach enables changes in
  resource usage by relating the changes in the
  parts to the activity driver. In this case, the
  changes in the parts were linked to the activity
  Issue Purchase Orders for Parts.

8

• Describe the position taken by Ed Branson on what
  is meant by cost savings. Prepare a schedule of
  employee time savings and a schedule of cost
  savings according to this viewpoint.
• See the cost savings as shown by Sally to reflect
  in reductions in employee headcount and payroll.
• Link the reduction in activity demand to the
  existing idle employee capacity in each
  department.

9
How much cost savings will be realized in the
next year in total and per unit for A12 junction
box according to this viewpoint? Purchasing
Department and Assembly Department will realize
the cost savings by reducing 1 person and 2
persons, respectively. Savings in Purchasing
Department 30,373.33 Savings in Assembly
Department 2 29,800 59,600.00 Employee
severance 15,000 Total Savings in Terms of
Employee Salaries 89,973.00 -15,000
88,473.00 Total Savings considering material
costs 88,473.00 - 100,000
(11,527.00) Total Profit / Loss per Unit
(0.12/unit)
10
Available Idle Time Estimates in Analysis?

• We should not take the temporary idle time in our
  estimates.
• Can be misleading as the work in next period can
  overwhelm the department and they may not have
  the idle resources.
• Take into consideration only long-standing idle
  time.
• If any exist, factor in changes in resources We
  should factor in changes in resource due to
  cyclical nature of business.

11
Our Point of View

• For any gains to be realized by the Wilson
  Electronics, the savings shown in Sallys ABC
  model should get reflected in terms of reduction
  in employees. Sallys proposal does not consider
  this.
• Eds proposal has two wrong assumptions
• 1) Taking temporary idle time into
  consideration.
• 2) He thinks employee reduction in headcount as
  the only effective way to save. He is not
  considering the savings in other cost pools like
  Supervision, Supplies and utilities, Equipment
  which constitutes 22 of the total savings.
• I would agree more with the Eds viewpoint if it
  takes care of the above loophole in his
  reasoning.

12
Net Savings

• Net savings Total Savings in Terms of Employee
  Salaries Overhead Cost - Increase in Material
  costs
• 88473.00 89973.00 0.22 - 100,000.00
  8267.06
• Net Dollar Savings 0.082/unit

13
Meeting Wilsons Strategic Needs

• Does this proposal meet the strategic needs of
  the company, with respect to competition on the
  A12 junction box product line? What other advice
  would you give Alice Johnson to help her prepare
  for the management team meeting?
• The proposal has gains of only 0.12/unit from
  the competitors price. So it fails to meet the
  strategic needs of the company.
• Total amount of idle capacity existing after
  parts reduction 109,025.80
• 0.325 30,373.33 0.25 29,066.67 0.14
  29,509 0.162 30,510.00 2.779
  29,800.00
• Existing amount of idle capacity 60,453.70
• 0.75 30,373.33 0.25 29,066.67 0.25
  29,509 0.25 31,100 0.5 30,510.00 0
  29,800.00

14
Meeting Wilsons Strategic Needs

• Overhead 109025.8 0.22 23985.50
• Total amount of savings 93,465.00
• 109025.80 60453.70 23985.50 - 100,000
• Total amount of savings/Unit 0.93/Unit
• If Alice is able to somehow use the idle capacity
  then the company can reap huge benefits out of
  it.
• One way to achieve it is by increasing production
  of A12 junction boxes. This will use the idle
  capacity.
• Selling the increased volume should not be
  problem as this is a commodity business and the
  competition is mainly due to the price.

15
Potential response of President Simms

• Simms wanted the ABC system to help in making
  better decisions that would improve overall
  company profitability.
• The data presented by Johnson would be solid
  enough to show how managers can make effective
  decisions, based on the changes in resources with
  change in parts.
• Simms should give the go-ahead to this project,
  because it will help in taking strategic
  decisions for the entire Wilsons operation.

16
Will the initiative be successful?

• Assuming Simms takes Alice Johnsons
  recommendation and commits the resources
  necessary to update Wilsons ABC model, do you
  think overall initiative will be successful?
• If we get similar cost reductions due to
  strategic changes in other products, Wilson will
  be able to get huge benefits from the ABC system.