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

Exercise 29

Activity-Based Costing of Suppliers

Kinnear Plastics manufactures various components for the aircraft and marine industry. Kinnear buys plastic from two vendors: Tappan Corporation and Hill Enterprises. Kinnear chooses the vendor based on price. Once the plastic is received, it is inspected to ensure that it is suitable for production. Plastic that is deemed unsuitable is disposed of.

The controller at Kinnear collected the following information on purchases for the past year:

	Tappan	Hill
Total purchases (tons)	2,200	4,100
Plastic discarded&	110	410

The purchasing manager has just received bids on an order for 150 tons of plastic from both Tappan and Hill. Tappan bid $741 and Hill bid $720 per ton.

Required

Assume that the average quality, measured by the amounts discarded from the two companies, will continue as in the past. Which supplier would you recommend that the purchasing manager select? Explain.

Step 1 of 4

Cost accounting system

This is a system designed for inhouse or internal managers and their decision making. Cost accounting information is not needed for comparison with other companies. This information is commonly used in financial accounting also, but it is primarily used by company managers for their decision making. It is important that cost accounting information is relevant for the decision making of the manager.