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AccountingManagerial Accounting: The Cornerstone of Business Decision-Making7th Edition

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Chapter 5, Problem 59P
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Managerial Accounting: The Corners...

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

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Chapter
Section
Problem 1DQ
Problem 2DQ
Problem 3DQ
Problem 4DQ
Problem 5DQ
Problem 6DQ
Problem 7DQ
Problem 8DQ
Problem 9DQ
Problem 10DQ
Problem 11DQ
Problem 12DQ
Problem 13DQ
Problem 14DQ
Problem 15DQ
Problem 1MCQ
Problem 2MCQ
Problem 3MCQ
Problem 4MCQ
Problem 5MCQ
Problem 6MCQ
Problem 7MCQ
Problem 8MCQ
Problem 9MCQ
Problem 10MCQ
Problem 11MCQ
Problem 12MCQ
Problem 13MCQ
Problem 14MCQ
Problem 15MCQ
Problem 16MCQ
Problem 17MCQ
Problem 18MCQ
Problem 19MCQ
Problem 20MCQ
Problem 21BEA
Problem 22BEA
Problem 23BEA
Problem 24BEA
Problem 25BEA
Problem 26BEA
Problem 27BEA
Problem 28BEA
Problem 29BEB
Problem 30BEB
Problem 31BEB
Problem 32BEB
Problem 33BEB
Problem 34BEB
Problem 35BEB
Problem 36BEB
Problem 37E
Problem 38E
Problem 39E
Problem 40E
Problem 41E
Problem 42E
Problem 43E
Problem 44E
Problem 45E
Problem 46E
Problem 47E
Problem 48E
Problem 49E
Problem 50E
Problem 51E
Problem 52E
Problem 53P
Problem 54P
Problem 55P
Problem 56P
Problem 57P
Problem 58P
Problem 59P
Problem 60P
Problem 61P
Problem 62P
Problem 63C
Problem 64C
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Managerial Accounting: The Corners...

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

Activity-Based Supplier Costing

Levy Inc. manufactures tractors for agricultural usage. Levy purchases the engines needed for its tractors from two sources: Johnson Engines and Watson Company. The Johnson engine has a price of $1,000. The Watson engine is $900 per unit. Levy produces and sells 22,000 tractors. Of the 22,000 engines needed for the tractors, 4,000 are purchased from Johnson Engines, and 18,000 are purchased from Watson Company. The production manager, Jamie Murray, prefers the Johnson engine. However, Jan Booth, purchasing manager, maintains that the price difference is too great to buy more than the 4,000 units currently purchased. Booth also wants to maintain a significant connection with the Johnson source just in case the less expensive source cannot supply the needed quantities. Jamie, however, is convinced that the quality of the Johnson engine is worth the price difference.

Frank Wallace, the controller, has decided to use activity costing to resolve the issue. The following activity cost and supplier data have been collected:

Chapter 5, Problem 59P, Activity-Based Supplier Costing Levy Inc. manufactures tractors for agricultural usage. Levy

Required:

  1. 1. CONCEPTUAL CONNECTION Calculate the activity-based supplier cost per engine (acquisition cost plus supplier-related activity costs). (Round to the nearest cent.) Which of the two suppliers is the low-cost supplier? Explain why this is a better measure of engine cost than the usual purchase costs assigned to the engines.
  2. 2. CONCEPTUAL CONNECTION Consider the supplier cost information obtained in Requirement 1. Suppose further that Johnson can only supply a total of 20,000 units. What actions would you advise Levy to undertake with its suppliers?

1.

To determine

Compute the cost of activity based supplier per engine. Identify the low-cost supplier and discuss the reason for considering the engine costs as a better measure as compared to the usual purchase costs.

Explanation

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 costs to different cost objects by using the drivers.

Computation of cost per engine by supplier:

Activity

Rate(R

($))

Quantity(Q)

Watson(R×Q)

($)

Johnson(R×Q)

($)

(A)Purchase cost90018,00016,200,000 
 1,0004.000 4,000,000
(B)Replacing engines40011,980792,000 
 40020 8,000
(C)Expediting orders5,0002192990,000 
 5,0002 10,000
(D)Repairing engines7202,4401,756,800 
 72060 43,200

Total Cost

(A+B+C+D)

  19,738,8004,061,200
Units  18,0004,000

Units costs

(Total CostsUnits)

  1,096

2.

To determine

Explain the actions that can be taken by Mr. L to deal with the suppliers.

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Ch-5 P-1DQCh-5 P-2DQCh-5 P-3DQCh-5 P-4DQCh-5 P-5DQCh-5 P-6DQCh-5 P-7DQCh-5 P-8DQCh-5 P-9DQCh-5 P-10DQ
Ch-5 P-11DQCh-5 P-12DQCh-5 P-13DQCh-5 P-14DQCh-5 P-15DQCh-5 P-1MCQCh-5 P-2MCQCh-5 P-3MCQCh-5 P-4MCQCh-5 P-5MCQCh-5 P-6MCQCh-5 P-7MCQCh-5 P-8MCQCh-5 P-9MCQCh-5 P-10MCQCh-5 P-11MCQCh-5 P-12MCQCh-5 P-13MCQCh-5 P-14MCQCh-5 P-15MCQCh-5 P-16MCQCh-5 P-17MCQCh-5 P-18MCQCh-5 P-19MCQCh-5 P-20MCQCh-5 P-21BEACh-5 P-22BEACh-5 P-23BEACh-5 P-24BEACh-5 P-25BEACh-5 P-26BEACh-5 P-27BEACh-5 P-28BEACh-5 P-29BEBCh-5 P-30BEBCh-5 P-31BEBCh-5 P-32BEBCh-5 P-33BEBCh-5 P-34BEBCh-5 P-35BEBCh-5 P-36BEBCh-5 P-37ECh-5 P-38ECh-5 P-39ECh-5 P-40ECh-5 P-41ECh-5 P-42ECh-5 P-43ECh-5 P-44ECh-5 P-45ECh-5 P-46ECh-5 P-47ECh-5 P-48ECh-5 P-49ECh-5 P-50ECh-5 P-51ECh-5 P-52ECh-5 P-53PCh-5 P-54PCh-5 P-55PCh-5 P-56PCh-5 P-57PCh-5 P-58PCh-5 P-59PCh-5 P-60PCh-5 P-61PCh-5 P-62PCh-5 P-63CCh-5 P-64C

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