Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773



Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem

Lambert Company has two suppliers: Deming and Leming. The cost of warranty work due to defective components is $2,000,000. The total units repaired under warranty average 100,000, of which 90,000 have components from Deming and 10,000 have components from Leming. Select the items below that represent true statements.

  1. a. Components purchased from Leming cost $200,000 more than their purchase price.
  2. b. Components purchased from Deming cost $1,800,000 more than their purchase price.
  3. c. Components from Leming appear to be of higher quality.
  4. d. All of these.
  5. e. None of these.

To determine

Identify the statement which is true regarding given situation of activity based supplier costing.


ABC Costing:

In activity based costing, overhead costs are allocated to various departments based on the respective cost driver. ABC costing provides a more accurate allocation than using a threshold rate. For example, using labor hours for allocating ordering costs would not be appropriate, rather number of orders should be used to allocate the cost.


Cost of warranty work due to defective component is $2,000,000. Under ABC system, this cost is to be apportioned between suppliers on the basis of,components requiring repair, which were received from each supplier.

Computation of apportionment of cost:

ParticularsAmount ($)
Cost of warranty work2,000,000
Total units repaired100,000
Defective components from D90,000
Defective components from L10,000
Apportionment of cost to D ($2,000,000×90,000100,000)1,800,000
Apportionment of cost to L ($2,000,000×10,000100,000)200,000

Table (1)

Supplier cost would include cost of warranty work and purchase price

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