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: $\begin{array}{lcr}\text { Department }&\text {Expected Use of Driver}&\text { Cost }\
\text { Processing } & 800 & \$ 1,500,000 \
\text { Packaging } & 200,000 & 1,500,000 \
\text { Testing } & 2,000 & 600,000
\end{array}$

$\text { Production information for the two products is as follows: }$

$\begin{array}{lcc}&\text {Oil }&\text {Sludge }\
\text { Department}&\text { Expected Use of Driver}&\text { Expected Use of Driver }\\hline
\text { Processing } & 300 & 500 \
\text { Packaging } & 120,000 & 80,000 \
\text { Testing } & 1,600 & 400
\end{array}$ The amount of overhead assigned to Sludge using ABC is
A) $1,800,000.
B) $1,657,500.
C) $1,942,500.
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: $\begin{array}{lcr}\text { Department }&\text {Expected Use of Driver}&\text { Cost }\
\text { Processing } & 800 & \$ 1,500,000 \
\text { Packaging } & 200,000 & 1,500,000 \
\text { Testing } & 2,000 & 600,000
\end{array}$

$\text { Production information for the two products is as follows: }$

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

Quizplus · Accepted Answer

To calculate the overhead assigned to Sludge using Activity-Based Costing (ABC), we first determine the cost per unit of each activity (processing, packaging, testing) by dividing the total cost by the expected use of the driver. Then, we multiply the cost per unit by the expected use of the driver for Sludge in each department.1. Processing: $1,500,000 / 800 transactions = $1,875 per transaction. Sludge uses 500 transactions, so $1,875 * 500 = $937,500.2. Packaging: $1,500,000 / 200,000 transactions = $7.50 per transaction. Sludge uses 80,000 transactions, so $7.50 * 80,000 = $600,000.3. Testing: $600,000 / 2,000 tests = $300 per test. Sludge uses 400 tests, so $300 * 400 = $120,000.Adding these amounts: $937,500 (Processing) + $600,000 (Packaging) + $120,000 (Testing) = $1,657,500.

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