contemporary management accounting

QUESTION 2 (20 marks) JIT system; activity-based costing; supplier costs; supplier selection; supplier performance measure; electronic systems. Use a separate answer booklet and clearly show each of the requirement numbers (and any parts to them) against your answers. There are 6 requirements to this question. Nevergrass Lid manufactures ride-on lawn mowers and is located in Brisbane. More than 70 per cent of the cost of the company's ride-on lawn mowers consists of material and components, which are purchased from Australian suppliers. About three years ago, Nevergrass introduced a comprehensive supplier evaluation system to monitor the performance of its suppliers. Each supplier was given a three-year contract that guaranteed large orders as long as it performed according to Nevergrass's strict requirements. Each supplier's performance was measured by considering its adherence to delivery schedules (Nevergrass works on a just-in-time system), accuracy of orders delivered, number of components rejected on delivery, and its achievements in reducing its production costs (and, therefore, its material and component prices) over the contract period. Performance in all of these areas will determine whether Nevergrass renews the supplier's contract or offers the contract to another supplier. The suppliers are aware that there are many alternative component suppliers who would be eager to enter into a long- term contract with Nevergrass. After holding discussions with the purchasing manager, as part of the review process, the financial controller has conducted a study to determine the full cost of dealing with suppliers. While the company uses a series of non-financial performance measures to measure most aspects of supplier performance, the financial controller believes that the calculation of the total cost of ownership will provide an additional perspective to viewing supplier performance. For the most recent year, the following supplier-related activities and costs have been identified: Activity Total Cost Number of activities Order components from Supplier $1 800 000 6 000 orders Receive order 9 000 000 10 000 deliveries Return reject components to supplier 38 500 55 returns Receive late deliveries 260 000 130 late deliveries Production downtime due to late deliveries 2 400 000 800 hours Production downtime due to defective material 3 600 000 3 000 hours Process invoice and pay supplier 1 050 000 3 000 invoices 50 disputes Dispute invoice amount 40 000 Quality audit of suppliers 500 000 10 audits 6 200108 FINAL EXAM - AUTUMN 2013