As an assistant cost accountant for Spears Industries, you have been assigned to review the activity base for the predetermined factory overhead rate. The president, Jessica Romo, 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 your recommendation.

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2007 2010 2009 2008 2006 $ 640,000 $ 610,000 611,000 $ 1,000 $2,450,000 86,000 Actual overhead Applied overhead (Over-) underapplied overhead Direct labor cost Machine hours $ 880,000 $ 680,000 $ 710,000 866,000 (6,000) $3,450,000 122,000 642,000 2$ 675,000 (2,000) $2,590,000 92,000 4,000 $2,820,000 102,000 24 5,000 $2,700,000