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

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 = (Estimated overhead)/(Estimated direct labor cost)`

`Estimated overhead rate = (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 = (Estimated overhead)/(Estimated machine hours)`

`Estimated overhead rate = (240,000)/(15,000)`

`Estimated overhead rate = 16`