As an assistant cost accountant for Lovett Industries, you have been assigned to review the activity base for the predetermined factory overhead rate. The president, Calvin Adler, has expressed concern that the over- or underapplied overhead has fluctuated excessively over the years.

An analysis of the company's operations and use of the current overhead rate (direct materials usage) has narrowed the possible alternative overhead bases to direct labor cost and machine hours. For the past five years, the following data have been gathered:

1. Calculate a predetermined factory overhead rate for each alternative base, assuming that rates would have been determined by relating the amount of factory overhead for the past five years to the base.
2. For each of the past five years, determine the over- or underapplied overhead, based on the two predetermined overhead rates developed in part (1).
3. Which predetermined overhead rate would you recommend? Discuss the basis for yourrecommendation.

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2008 2007 2006 2005 2004 Actual overhead Applied overhead (Over-) underapplied overhead Direct labor cost Machine hours S 590,000 918,000 450,000 566,000 501,000 582,000 928,000 460,000 57,000 480,000 9,000) S 21,000 S2,150,000 3,350,000 $1,630,000 $2,040,000 1,830,000 42,000 8,000 10,000)(10,000 50,000 75,000 35,000 48,000