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			68,400				15,000			15,000
Failed tests	1,300			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

Activity-based concept states that costs should be recognized on the basis of activities which they can be traced back to and not specific blanket rate.

First of all , cost per each activity needs to be computed

	Alpha Electronics		La paz company		Total		Cost per
	125X	30Y	125X	30Y	Activity	Cost	activity
Failed tests	1300	780	10	10	2100	1,200,000	571
Number of reorders	60	40	0	0	100	300,000	3000

Each activity rate needs to be multiplied with the number of activities to get total cost in each product as and added to purchase cost to arrive at the cost per unit as:

	Alpha Electronics		La Paz company
	125X	30Y	125X	30Y	Total
Purchase price	10	26	12	28
Units purchased	120,000	68400	15000	15000
Total purchase price	$    1,200,000	$ 1,778,400	$      180,000	$             420,000	$           3,578,400
Testing components	$        742,857	$     445,714	$           5,714	$                 5,714	$           1,200,000
Reordering components	$        180,000	$     120,000			$               300,000
Total costs (a)	$    2,122,857	$ 2,344,114	$      185,714	$             425,714	$           5,078,400
Units purchased (b)	120,000	68400	15000	15000
Unit cost (a/b)	$             17.69	$          34.27	$           12.38	$                 28.38

742857 = 1300 *571 & 180000 = 60 * 3000 and so on