Bowman Company manufactures cooling systems and they produce all the parts necessary for its...


Bowman Company manufactures cooling systems and they produce all the parts necessary for its product except for one electronic component, which is purchased from two local suppliers: Manzer Inc. and Buckner Company. Both suppliers are reliable and seldom deliver late; however, Manzer sells the component for $89 per unit, while Buckner sells the same component for $86. Bowman purchases 80% of its components from Buckner because of its lower price. The total annual demand is 4,000,000 components.

To help assess the cost effect of the two components, the following data were collected for supplier-related activities and suppliers.

I. Activity Data

Activity Cost
Inspecting components (sampling only) $480,000
Reworking products (due to failed component) 6,084,000
Warranty work (due to failed component)9,600,000

II. Supplier Data

Mazner Inc.Buckner Company
Unit purchase price$89$86
Units purchased800,0003,200,000
Sampling hours* 803,920
Rework hours 3605,640
Warranty hours 80015,200

(*)Sampling inspection for Manzer's product has been reduced because the reject rate is so low


1. Calculate the cost per component for each supplier, taking into consideration the costs of the supplier-related activities and using the current prices and sales volume.

2a. Suppose that Bowman loses $4,000,000 in sales per year because it develops a poor reputation due to defective units attributable to failed components. Using warranty hours, assign the cost of lost sales to each supplier.

2b. By how much would this change the cost of each supplier's component?

3. Based on the analysis in Requirements 1 and 2, discuss the importance of activity-based supplier costing for internal decision making.

Activity-Based Costing

Activity-based costing (ABC) allocates costs using the amount of activities incurred for each product or service. The use of activities to allocate costs provides for a more accurate allocation of costs due to the casual relationship between usage of activities and costs incurred for each product or service. In terms of analyzing activities, the ABC system classifies activities as unit-level , batch-level, product-level and facility-sustaining level. A suitable cost driver will need to be assigned based on the nature of activities used by a product or service.

Answer and Explanation: 1

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Cost Pool Activity Cost Activity Quantity Activity Rate Costs Allocated to Mazer Costs Allocated to Buckner
Inspecting Components 480,000...

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Learn more about this topic:

The Activity-Based Costing Process


Chapter 5 / Lesson 3

Activity-based costing is used to track costs for each aspect of production. Learn the activity-based costing process, including how to use activity cost pools, find activity rates, assign overhead, and report information on a manufacturing overhead budget.

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