As an assistant cost accountant for Firewall Industries, you have been assigned to review the activity base for the predetermined factory overhead rate. The president, JoJo Gunn, is concerned about the wide fluctuation in the amount of over- or underapplied overhead in recent years.

An analysis of the company's operations and use of the current overhead rate (direct labor cost) 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:

In teams:
A. Calculate a predetermined factory overhead rate for each alternative base, assuming that rates would have been determined using the total actual amount of factory overhead for the past five years to the total associated activity base for the same five-year period.
B. For each of the past five years, determine the over- or underapplied overhead, based on the two predetermined overhead rates developed in (A).
C. Select a predetermined overhead rate that the company should use, and discuss the basis for your recommendation.

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Year 5 Year 4 Year 3 Year 2 Year 1 Actual overhead Applied overhead (Over- underapplied overhead13,000 Direct labor cost Machine hours $ 790,000 870,000 $ 935,000 $ 845,000 $ 760,000 777,000 (17,000) $3,885,000 $4,410,000 $4,620,000 $4,200,000 $3,885,000 91,600 924,000 (12,000) 11,000 777,000 882,000 840,000 5,000 93,000 104,000 111,000 100,400