Topic: Management Accounting Problem

Testa Limited manufactures small cars and is located in Sydney. More than 80 percent of the cost of the company's cars consists of materials and components, which are purchased from Australian suppliers. About three years ago, Testa 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 Testa's strict requirements. Each supplier's performance was measured by considering its adherence to delivery schedules (Testa works on a JIT system), the accuracy of orders delivered, a 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 Testa 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 Testa.

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:

1. Determine the cost per unit of activity driver for each supplier-related activity.

2. Calculate the total cost of ownership and the per-unit cost of ownership for the two suppliers.

3. Calculate the supplier performance index for the two suppliers.

4. Analyse the performance of the two suppliers.

5. What is the total cost of ownership and the per-unit cost of ownership for Chrome Manufacturers if the number of late deliveries is reduced

to 12 and the production downtime due to late deliveries is reduced to 30 hours?

6. Describe the changes that the purchasing manager and the financial controller could implement to minimize supplier-related costs.

7. Consider the various criteria used by Testa to determine whether or not supplier contracts should be renewed. For each criterion, suggest

two performance measures that Testa might use to evaluate a supplier's performance.

8. Testa is considering implementing electronic systems for transacting with suppliers. Outline some advantages that might accrue to both

Testa and its suppliers for such systems.

9. What is the meaning of a collaborative relationship with a supplier and how can Testa Limited benefit from having a collaborative relationship

with its suppliers?

ACTIVITY TOTAL COST Order components from supplier Receive order Return reject components to supplier Receive late deliveries Production downtime due to late delivery Production downtime due to defective material Process invoice and pay supplier Dispute in voice amount Quality audit of supplier $1 800 000 $9 000 000 $38 500 $260 000 $2 400 000 $3 600 000 $1 050 000 $40 000 $500 000 NUMBER OF ACTIVITIES 6 000 orders 10 000 deliveries 55 returns 130 late deliveries 800 hours 3 000 hours 3 000 invoices 50 disputes 10 audits Testa obtains its exhaust systems from two suppliers: Hot Exhausts and Chrome Manufacturers. Last year, Testa purchased 3 000 units from Hot Exhausts at $100 per unit, and 4 000 units from Chrome Manufacturers at $90 per unit. Both suppliers provide an identical component. The analysis revealed that last year the following activities related to the two suppliers: ACTIVITY HOT EXHAUSTS Order components from supplier Receive order Return reject components to supplier Receive late deliveries Production downtime due to late delivery Production downtime due to defective material Process invoice and pay supplier Dispute invoice amount Quality audit of supplier 90 orders 90 deliveries 15 returns 6 late deliveries 45 hours 20 hours 12 invoices 3 disputes 1 audit CHROME MANUFACTURERS 130 orders 150 deliveries 16 returns 28 late deliveries 59 hours 29 hours 130 invoices 3 disputes 2 audits Required