Predetermined overhead rates As an assistant cost accountant for Mississippi Industries, you have been assigned to review the activity base for the predetermined factory overhead rate. The president, Tony Favre, 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 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:

2016 2015 2014 2013 2012 Actual overhead $ 790,000 $ 870,000 $ 935,000 $ 845,000 $ 760,000 Applied overhead 777,000 882,000 924,000 840,000 777,000

(Over-) underapplied overhead $ 13,000 $ (12,000) $ 11,000 $ 5,000 $ (17,000)

Direct labor cost $3,885,000 $4,410,000 $4,620,000 $4,200,000 $3,885,000 Machine hours 93,000 104,000 111,000 100,400 91,600 1. Calculate a predetermined factory overhead rate for each alternative base, assuming that rates would have been determined by relating the total 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.