Question

A company incurs $3660000 of overhead each year in three departments: Processing, Packaging, and Testing. The company performs 800 processing transactions, 200000 packaging transactions, and 2000 tests per year in producing 400000 drums of Oil and 600000 drums of Sludge. The following data are available: Department Expected Use of Driver Cost Processing 800 $1530000 Packaging 200000 1530000 Testing 2000 600000 Production information for the two products is as follows: Oil Sludge Department Expected Use of Driver Expected Use of Driver Processing 300 500 Packaging 120000 80000 Testing 1600 400 The amount of overhead assigned to Oil using ABC is $1830000. $1971750. $1688250. $1410000.

Answer 1

Calculate activity rate for each department as follows:

Processing = Cost / Expected use of cost driver = $1530000/800 = $1912.50 per cost driver

Packaging = Cost / Expected use of cost driver = $1530000/200000 = $7.65 per cost driver

Testing = Cost / Expected use of cost driver = $600000/2000 = $300 per cost driver

Calculate overhead cost assigned to Oil in each department as follows:

Processing = Activity rate x Expected use of cost driver = $1912.50 x 300 = $573750

Packaging = Activity rate x Expected use of cost driver = $7.65 x 120000 = $918000

Testing = Activity rate x Expected use of cost driver = $300 x 1600 = $480000

Therefore,

The amount of overhead assigned to Oil using ABC = $573750 + $918000 + $480000 = $1971750