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: 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:  Calculate the amount of overhead assigned to Oil.
A)$600,000 
B)$647,500 
C)$552,500 
D)$460,000

Quizplus · Accepted Answer

To calculate the amount of overhead assigned to Oil, we need to use the activity-based costing (ABC) method.

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

Processing department overhead rate = $1,200,000 / 800 processing transactions = $1,500 per processing transaction 
Packaging department overhead rate = $1,200,000 / 200,000 packaging transactions = $6 per packaging transaction 
Testing department overhead rate = $1,200,000 / 2,000 tests = $600 per test

Next, we need to determine the number of transactions and tests for each product:
Oil: 
Processing transactions = 400,000 drums x 2 processing transactions per drum = 800,000 processing transactions 
Packaging transactions = 400,000 drums x 1 packaging transaction per drum = 400,000 packaging transactions 
Tests = 400,000 drums x 1 test per drum = 400,000 tests

Sludge: 
Processing transactions = 600,000 drums x 2 processing transactions per drum = 1,200,000 processing transactions 
Packaging transactions = 600,000 drums x 1 packaging transaction per drum = 600,000 packaging transactions 
Tests = 600,000 drums x 1 test per drum = 600,000 tests

Finally, we can calculate the overhead assigned to each product:
Oil: 
Processing overhead = 800,000 processing transactions x $1,500 per processing transaction = $1,200,000 
Packaging overhead = 400,000 packaging transactions x $6 per packaging transaction = $2,400,000 
Testing overhead = 400,000 tests x $600 per test = $240,000 
Total overhead assigned to Oil = $1,200,000 + $2,400,000 + $240,000 = $3,840,000

Sludge: 
Processing overhead = 1,200,000 processing transactions x $1,500 per processing transaction = $1,800,000 
Packaging overhead = 600,000 packaging transactions x $6 per packaging transaction = $3,600,000 
Testing overhead = 600,000 tests x $600 per test = $360,000 
Total overhead assigned to Sludge = $1,800,000 + $3,600,000 + $360,000 = $5,760,000

Therefore, the amount of overhead assigned to Oil is $3,840,000, which corresponds to choice B.

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