Durable Engines Company uses ABC to account for it manufacturing process.

Durable Engines Company expects to produce 2,000 engines.Durable Engines Company also expects to use 12,000 parts and have 16 setups.
The allocation rate for packaging is
A)$5.28.
B)$6.40.
C)$9.60.
D)$3.00.

Question

Durable Engines Company uses ABC to account for it manufacturing process.

Durable Engines Company expects to produce 2,000 engines.Durable Engines Company also expects to use 12,000 parts and have 16 setups.
The allocation rate for packaging is
A)$5.28. 
B)$6.40. 
C)$9.60. 
D)$3.00.

Quizplus · Accepted Answer

Since the problem uses ABC to account for its manufacturing process, we need to identify the cost drivers for each activity. The problem states that 12,000 parts will be used, which will be the cost driver for the parts activity. The problem also states that there will be 16 setups, which will be the cost driver for the setups activity. 
To calculate the allocation rate for packaging, we need to determine the total cost for the packaging activity and divide it by the total number of cost drivers for that activity. We are not given the total cost for the packaging activity, but we are given the information to calculate it. 
The problem states that the total expected production of engines is 2,000. Assuming each engine needs one package, then the total number of packaging needed is also 2,000. Therefore, packaging is the cost driver for the packaging activity, and the total cost for packaging is $12,800 (2,000 packages x $6.40 per package). 
Dividing the total cost of packaging by the total number of packaging needed gives us an allocation rate of $6.40 per package. 
Therefore, the best choice is B: $6.40.

Durable Engines Company Uses ABC to Account for It Manufacturing