A company incurs $3,600,000 of overhead each year in three departments: Processing, Packaging, and Testing. The company performs 800 processing transactions, 200,000 packaging transactions, and 2,000 tests per year in producing 400,000 drums of Oil and 600,000 drums of Sludge. The following data are available: $\begin{array}{crr}\text { Department}&\text {Expected use of Driver }&\text {Cost }\
\hline \text { Processing } & 800 & \$ 1,500,000 \
\text { Packaging } & 200,000 & 1,500,000 \
\text { Testing } & 2,000 & 600,000
\end{array}$

$\text { Production information for the two products is as follows: }$
$\begin{array}{lcc}&\text { Oil }&\text { Sludge }\
\text { Department }&\text { Expected Use of Driver }&\text { Expected Use of Driver }\
\text { Processing } & 300 & 500 \
\text { Packaging } & 120,000 & 80,000 \
\text { Testing } & 1,600 & 400
\end{array}$ The amount of overhead assigned to Oil using ABC is
A)$1,800,000.
B)$1,942,500.
C)$1,657,500.
D)$1,380,000.

Question

A company incurs $3,600,000 of overhead each year in three departments: Processing, Packaging, and Testing. The company performs 800 processing transactions, 200,000 packaging transactions, and 2,000 tests per year in producing 400,000 drums of Oil and 600,000 drums of Sludge. The following data are available: $\begin{array}{crr}\text { Department}&\text {Expected use of Driver  }&\text {Cost }\
\hline \text { Processing } & 800 & \$ 1,500,000 \
\text { Packaging } & 200,000 & 1,500,000 \
\text { Testing } & 2,000 & 600,000
\end{array}$

$\text { Production information for the two products is as follows: }$
$\begin{array}{lcc}&\text { Oil }&\text { Sludge }\
\text { Department }&\text { Expected Use of Driver }&\text { Expected Use of Driver }\
\text { Processing } & 300 & 500 \
\text { Packaging } & 120,000 & 80,000 \
\text { Testing } & 1,600 & 400
\end{array}$ The amount of overhead assigned to Oil using ABC is
A)$1,800,000.
B)$1,942,500.
C)$1,657,500.
D)$1,380,000.

Quizplus · Accepted Answer

The overhead assigned to Oil using ABC is $1,942,500. This is calculated by multiplying the overhead rate for each department by the expected use of the driver for that department for Oil. The overhead rate for Processing is $1,500,000/800 = $1,875 per transaction. The expected use of the driver for Processing for Oil is 300, so the overhead assigned to Oil from Processing is $1,875 * 300 = $562,500. The overhead rate for Packaging is $1,500,000/200,000 = $7.50 per transaction. The expected use of the driver for Packaging for Oil is 120,000, so the overhead assigned to Oil from Packaging is $7.50 * 120,000 = $900,000. The overhead rate for Testing is $600,000/2,000 = $300 per test. The expected use of the driver for Testing for Oil is 1,600, so the overhead assigned to Oil from Testing is $300 * 1,600 = $480,000. The total overhead assigned to Oil is $562,500 + $900,000 + $480,000 = $1,942,500.

A Company Incurs $3,600,000 of Overhead Each Year in Three