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: $$\begin{array}{l}
\begin{array} { l c r }
\text { Department } & \text { Expected Use of Driver } & { \text { Cost } } \
\text { Processing } & 800 & \$ 1,500,000 \
\text { Packaging } & 200,000 & 1,500,000 \
\text { Testing } & 2,000 & 600,000
\end{array}\
\text { Production information for the two products is as follows: }\\
\begin{array}{ll}
&\text { Oil }&\text { Sludae }\\text { Department }&\text { Expected Use of Driver }&\text { Expected Use of Driver }\\hline \text { Processing } & 300 & 500 \
\text { Packaging } & 120,000 & 80,000 \
\text { Testing } & 1,600 & 400
\end{array}
\end{array}$$ The amount of overhead assigned to Sludge using ABC is

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: $$\begin{array}{l}
\begin{array} { l c r } 
\text { Department } & \text { Expected Use of Driver } &  { \text { Cost } } \
\text { Processing } & 800 & \$ 1,500,000 \
\text { Packaging } & 200,000 & 1,500,000 \
\text { Testing } & 2,000 & 600,000
\end{array}\
\text { Production information for the two products is as follows: }\\
\begin{array}{ll}
&\text { Oil }&\text { Sludae }\\text { Department }&\text { Expected Use of Driver }&\text { Expected Use of Driver }\\hline \text { Processing } & 300 & 500 \
\text { Packaging } & 120,000 & 80,000 \
\text { Testing } & 1,600 & 400
\end{array}
\end{array}$$ The amount of overhead assigned to Sludge using ABC is

Quizplus · Accepted Answer

The overhead assigned to Sludge using ABC is $1,657,500. This is calculated by multiplying the overhead rate for each department by the expected use of the driver for that department for Sludge. The overhead rate for Processing is $1,500,000/800 = $1,875 per transaction. The overhead rate for Packaging is $1,500,000/200,000 = $7.50 per transaction. The overhead rate for Testing is $600,000/2,000 = $300 per test. The expected use of the driver for Processing for Sludge is 500 transactions. The expected use of the driver for Packaging for Sludge is 80,000 transactions. The expected use of the driver for Testing for Sludge is 400 tests. Therefore, the overhead assigned to Sludge is $1,875 * 500 + $7.50 * 80,000 + $300 * 400 = $1,657,500.

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