A company incurs $1,200,000 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: $$\begin{array} { c c c }
\text { Department } & \text { Estimated use of Driver } & \text { Cost } \
\hline \text { Processing } & 800 & \$ 500,000 \
\text { Packaging } & 200,000 & 500,000 \
\text { Testing } & 2,000 & 200,000
\end{array}$$ Production information for oil is as follows:
$$\begin{array} { l c }
\underline{\text { Department }} &\underline{ \text { Estimated use of Driver }} \
\text { Processing } & 300 \
\text { Packaging } & 120,000 \
\text { Testing } & 1,600
\end{array}$$ Calculate the amount of overhead assigned to oil.
A)$600,000
B)$647,500
C)$552,500
D)$460,000

Question

A company incurs $1,200,000 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: $$\begin{array} { c c c } 
\text { Department } & \text { Estimated use of Driver } & \text { Cost } \
\hline \text { Processing } & 800 & \$ 500,000 \
\text { Packaging } & 200,000 & 500,000 \
\text { Testing } & 2,000 & 200,000
\end{array}$$ Production information for oil is as follows:
$$\begin{array} { l c } 
\underline{\text { Department }} &\underline{ \text { Estimated use of Driver }} \
\text { Processing } & 300 \
\text { Packaging } & 120,000 \
\text { Testing } & 1,600
\end{array}$$ Calculate the amount of overhead assigned to oil.
A)$600,000
B)$647,500
C)$552,500
D)$460,000

Quizplus · Accepted Answer

First, we need to calculate the overhead rate for each department:

Processing: $1,200,000 / 800 transactions = $1,500 per transaction
Packaging: $1,200,000 / 200,000 transactions = $6 per transaction
Testing: $1,200,000 / 2,000 tests = $600 per test

Next, we need to allocate the overhead to each product based on the number of transactions or tests performed in each department for each product.

For oil:
Processing overhead = 800 transactions * $1,500 per transaction = $1,200,000
Packaging overhead = 0 (no packaging transactions for oil)
Testing overhead = 2,000 tests * $600 per test = $1,200,000

Total overhead assigned to oil = $1,200,000 + $0 + $1,200,000 = $2,400,000
Overhead per drum of oil = $2,400,000 / 400,000 drums = $6 per drum

Therefore, the amount of overhead assigned to oil is $6 per drum or $600,000 (100,000 drums of oil are produced). The best choice is B because it correctly calculates the overhead assigned to oil.

A Company Incurs $1,200,000 of Overhead Each Year in Three