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

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

Quizplus · Accepted Answer

The overhead assigned to Sludge using ABC is $1,657,500. This is calculated by multiplying the overhead cost for each department by the expected use of the driver for that department for Sludge, and then summing the results.For the Processing department, the overhead cost is $1,500,000 and the expected use of the driver for Sludge is 500. So, the overhead assigned to Sludge from the Processing department is $1,500,000 * 500 / 800 = $937,500.For the Packaging department, the overhead cost is $1,500,000 and the expected use of the driver for Sludge is 80,000. So, the overhead assigned to Sludge from the Packaging department is $1,500,000 * 80,000 / 200,000 = $600,000.For the Testing department, the overhead cost is $600,000 and the expected use of the driver for Sludge is 400. So, the overhead assigned to Sludge from the Testing department is $600,000 * 400 / 2,000 = $120,000.Adding these amounts together, we get $937,500 + $600,000 + $120,000 = $1,657,500.

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