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Managerial Accounting: The Corners...

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

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BuyFindarrow_forward

Managerial Accounting: The Corners...

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