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			70,900				15,000			15,000
Failed tests	1,700			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

Determination the cost of each supplier by using ABC
	Alpha Electronics			La Paz Company
	125X	30Y		125X	30Y
Units purchased	120000	70900		15000	15000
x Unit Puchase price	$10.00	$26.00		$12.00	$28.00
Purchase cost	$1,200,000.00	$1,843,400.00		$180,000.00	$420,000.00
Allocation of testing components cost [$480 per failed test]	$816,000.00	$374,400.00		$4,800.00	$4,800.00
Allocation of re-ordering components cost [$3000 per order]	$180,000.00	$120,000.00
Total cost	$2,196,000.00	$2,337,800.00		$184,800.00	$424,800.00
/ Units Purchased	120000	70900		15000	15000
Unit Cost	$18.30	$32.97		$12.32	$28.32
Working
Calculation of Activity Rates
Testing Components activity = Activity cost / Total Number of failed testes = $12,00,000 / 2500 failed tests = $480 per failed test
Reordering Components activity = Activity cost / Total number of re-orders = $3,00,000/100 re-orders = $3000 per re-order