Question

Activity-Based Supplier Costing

Clearsound uses Alpha Electronics and La Paz Company to buy two electronic components used in the manufacture of its cell phones: Component 125X and Component 30Y. Consider two activities: testing components and reordering components. After the two components are inserted, testing is done to ensure that the two components in the phones are working properly. Reordering occurs because one or both of the components have failed the test and it is necessary to replenish component inventories. Activity cost information and other data needed for supplier costing are as follows:

I. Activity Costs Caused by Suppliers (testing failures and reordering as a result)

Activity	Costs
Testing components	$1,200,000
Reordering components	300,000

II. Supplier Data

	Alpha Electronics							La Paz Company
	125X			30Y				125X			30Y
Unit purchase price	$10			$26				$12			$28
Units purchased	120,000			79,100				15,000			15,000
Failed tests	2,000			780				10			10
Number of reorders	60			40				0			0

Required:

Determine the cost of each supplier by using ABC. Round Test and Reorder rates to the nearest dollar, and final answers to the nearest cent.

	Alpha Electronics			La Paz Company
	125X	30Y		125X	30Y
Unit cost:	$_______	$_______		$_______	$_______

Answer 1

Rate per Failed test:- Rate per failed test is = (Cost of testing components/Total no of failed tests ) Rate per failed test is = (1200000/(2000-780-10-10) Rate per failed test is = $ 429/. Rounded off Rate per Reorder :- Rate per Reorder is = (Cost of Reordering components/Total no of reorders) Rate per Reorder is = (300000/(60+40+0+0)) Rate per Reorder is = $3,000/. La Paz Company 125X 30Y 12.00 28.00 Determination of cost of each supplier by using ABC :- Alpha Electronics Particulars 125X 30Y Unit purchase price (A) 10.00 26.00 Units testing component cost :- Cost allocated for testing of components 858,000 334,620 Cost allocated for Reordering components 180,000 120,000 Total cost 1,038,000 454,620 No of units produced 120,000 79,100 Cost per unit (B) 8.65 5.75 Cost of each supplier 18.65 31.75 4,290 4,290 4,290 4,290 15,000 0.29 12.29 15,000 0.29 28.29