Raindrop Gear Utilizes Job-Order Costing for Production of Customized Umbrellas

question 27

Short Answer

Raindrop Gear utilizes job-order costing for production of customized umbrellas.Each division establishes its own estimates regarding overhead, which are as follows: $\begin{array}{lrr}&\text { Division } \mathrm{A}&\text { Division } \mathrm{B}\\\text { Total estimated overhead } & \$ 78,750 & \$ 240,000 \\\text { Total estimated machine hours } & 26,250 & 15,000 \\\text { Total estimated direct labor costs } & \$ 262,500 & \$ 120,000\end{array}$ 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? $\begin{array}{lll}&\text { Division } \mathrm{A}&\text { Division } \mathrm{B}\\\text { A. } & \$ 3.00 \text { per direct labor dollar } & \$ 16.00 \text { per machine hour } \\\text { B. } & \$ 3.00 \text { per machine direct labor dollar } & \$ 0.625 \text { per machine hour } \\\text { C. } & \$ 0.30 \text { per machine direct labor dollar } & \$ 16.00 \text { per machine hour } \\\text { D. } & \$ 0.30 \text { per machine direct labor dollar } & \$ 2.00 \text { per machine hour }\end{array}$

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Definitions:

Long Run

A period of time in which all factors of production and costs are variable, allowing firms to adjust all inputs in response to market changes.

Inputs

Inputs are the resources such as labor, materials, and capital that are used in the production process to create goods and services.

Industry Entry

The process by which a new competitor or business enters into an industry, facing various barriers such as high startup costs, regulatory requirements, and competition.

Short Run

A period of time during which at least one of a firm's inputs is fixed and cannot be changed.