Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 28

Activity-Based Costing of Suppliers

Davis Fabricators buys metal for manufacturing from two suppliers, Alpha Metals and First Parts. If the metal is delivered late, the shipment to the customer is delayed. Delayed shipments lead to contractual penalties that call for Davis to reimburse a portion of the purchase price to the customer.

During the past quarter, the purchasing and delivery data for the two suppliers showed the following:

	Alpha	First	Total
Total purchases (tons) &	10,000	6,000	16,000
Average purchase price&	$ 10.00	$ 12.00	$ 10.75
Number of deliveries&	80	20	100
Percentage of late deliveries	25%	5%	21%

The accounting department recorded $33,600 as the cost of late deliveries to customers.

Required

Assume that the average quality, measured by the percentage of late deliveries, and prices from the two companies will continue as in the past. What is the effective price for metal from the two companies when late deliveries are considered?

Step 1 of 5

Activity based costing

Activity based costing is modern method used to assign overhead cost to a product or department or to a job. Under this method the cost are allocated based on the activity volume consumed by each department or product. Activity based costing uses multiple activities related to cost and based on these activities cost is allocated.

Formula to calculate activity rate under activity based costing.