Question

A company incurs $3,600,000 of overhead each year in three departments: Processing, Packaging, and Testing. Traditionally, they have allocated this cost evenly based on total production (in barrels). In considering ABC, the company identifies that they perform 800 processing transactions, 200,000 packaging transactions, and 2,000 tests per year across the departments to produce 400,000 drums of Oil and 600,000 drums of Sludge. The following data are available:

Department	Transactions/Tests	Expected Cost
Processing	800	$1,500,000
Packaging	200,000	1,500,000
Testing	2,000	600,000

Planned transaction and test volume information for the two products is as follows:

Department	Oil	Sludge
Processing	300	500
Packaging	120,000	80,000
Testing	1,600	400

Compared to ABC, using the traditional approach

the company over allocated $502,500 to Sludge.

the company over allocated $780,000 to Sludge.

the company over allocated $502,500 to Oil.

the company over allocated $360,000 to Oil.

Answer 1

overhead allocated under Traditional Approach
3,600,000/(400,000+600,000)
3.6
overhead allocated to oil			3.6*400,000			1440000
overhead allocated to Sludge			3.6*600,000			2160000
total						3600000
overhead allocated under ABC
					oil	Sludge
processing (1,500,000/800)*300;500					562500	937500
Packaging (1,500,000/200000)*120000; 80,000					900000	600000
Testing	(600,000/2,000)*1,600;400				480000	120000
Total overhead allocated					1942500	1657500	3600000
oil
overhead allocated under traditional					1440000
overhead allocated under ABC					1942500
overhead differecne					502500	under allocted under traditional
sludge
overhead allocated under traditional					2160000
overhead allocated under ABC					1,657,500
overhead differecne					502,500	over allocated under traditional
Answer - the company over allocated $502,500 to Sludge