Question

Activity-Based Supplier Costing Bowman Company manufactures cooling systems. Bowman produces all the parts necessary for its product except for one electronic component, which is purchased from two local suppliers: Manzer Inc. and Buckner Company. Both suppliers are reliable and seldom deliver late; however, Manzer sells the component for $89 per unit, while Buckner sells the same component for $86. Bowman purchases 80% of its components from Buckner because of its lower price. The total annual demand is 4,000,000 components. To help assess the cost effect of the two components, the following data were collected for supplier-related activities and suppliers: I. Activity Data Activity Cost Inspecting components (sampling only) $480,000 Reworking products (due to failed component) 6,084,000 Warranty work (due to failed component) 9,600,000 II. Supplier Data Manzer Inc. Buckner Company Unit purchase price $89 $86 Units purchased 800,000 3,200,000 Sampling hours* 80 3,920 Rework hours 360 5,640 Warranty hours 800 15,200 * Sampling inspection for Manzer’s product has been reduced because the reject rate is so low. Required: 1. Calculate the cost per component for each supplier, taking into consideration the costs of the supplier-related activities and using the current prices and sales volume. (Note: Round the unit cost to two decimal places.) Manzer Inc. $ 72,300,400 per unit Buckner Company $ 295,024,600 per unit 2a. Suppose that Bowman loses $4,000,000 in sales per year because it develops a poor reputation due to defective units attributable to failed components. Using warranty hours, assign the cost of lost sales to each supplier. Manzer $ Buckner $ 2b. By how much would this change the cost of each supplier's component? Round your answers to the nearest cent. Manzer unit cost increase $ Buckner unit cost increase $ 3. Based on the analysis in Requirements 1 and 2, discuss the importance of activity-based supplier costing for internal decision making. As with product costing, accurate assignment of costs to the cost object is essential for well-grounded decision making. Suppliers can cause a firm to perform costly activities such as inspection, rework, and warranty work. The of a component is thus more than its purchase price. As this example shows, the component with the price is actually less expensive because it causes less demand on internal costly activities. Thus, the company would likely the purchases of the one supplier in favor of the other. It also might attempt to work with the one supplier which is causing significant demands on internal activities to see if the quality of its component can be increased.

Answer 1

1.)

Activity Based Costing (ABC):

Activity based costing is an apportionment of costs that first considers the activity drivers that helps in the allocation of costs to various activities and then allocates the costs to different cost objects by using the drivers.

Computation of Cost per each component for each supplier:

Company M Company B (RXQ) (RXQ) Activity Rate(R) Quantity(Q) (A)Purchase costs 189 71,200,000 800,000 3,200,000 275,200,000 (B)Inspecting components 120 80 9,600 120 3,920 470,400 (C)Reworking products 1,014 360 365,040 5,718,960 1,014 600 5,640 800 (D) Warranty work 480,000 600 15,200 9,120,000 Total Cost 72,054,640 290,509,360 (A+B+C+D) Units 800,000 3,200,000

Unit Costs(Total Costs/Units)

90.07

90.78