Question

Raindrop gear utilizes job-order costing for production of customized umbrellas. each division establishes its own estimates regarding overhead, which are as follows: division a division b total estimated overhead $78,750 $240,000 total estimated machine hours 26,250 15,000 total estimated direct labor costs $262,500 $120,000 if division a allocates overhead on the basis of direct labor costs, and division b allocates overhead based on machine hours, what will be the predetermined overhead rate for each division?

Answer 1

Answer:

Division A will allocate overhead at $0.30 for every $1 it spends on direct labor.

Division B will allocate overhead at $16 per machine hour.

We arrive at the answers above as follows:

Division A

Estimated overhead ($)                            78,750

Estimated direct labor costs ($)               262,500

Estimated direct machine hours               26,250    

Basis for overhead allocation                    Direct labor costs

Estimated overhead rate is calculated with the following formula:

$Estimated overhead rate = \frac{Estimated overhead}{Estimated direct labor cost}$

$Estimated overhead rate = \frac{78,750}{262,500}$                            

$Estimated overhead rate = 0.3$

Division B

Estimated overhead ($)                            240,000

Estimated direct labor costs ($)               120,000

Estimated direct machine hours                15,000    

Basis for overhead allocation                   Machine hours

Estimated overhead rate is calculated with the following formula:

$Estimated overhead rate = \frac{Estimated overhead}{Estimated machine hours}$

$Estimated overhead rate = \frac{240,000}{15,000}$                            

$Estimated overhead rate = 16$