Hokuri-Seika Co. Ltd of Yohomaha, Japan is a sub-contractor of a local manufacturing company in the USA. The company specializes in cutting metal water jets and high-energy lasers. The company uses a Job-Order costing system where Direct Material and Direct Labor are allocated directly to each Job, but FOH is applied to jobs using a pre-determined overhead rate based on Direct Labor Hours.

Management has been using this method for all overhead costs. However, recently the accounting department proposed to management to use ABC (Activity-Based Costing) for the allocation of electricity costs. With the ABC method, electricity costs are allocated to jobs based on machine hours, because machines use the most electricity.

The following is the data for the last two months:

	Direct Labor Hours	Machine hours	Electrical costs
Week - 1	8.920	7.200	77.100
Week - 2	8.810	8.200	84.400
Week - 3	8.950	8.700	80.400
Week - 4	8.990	7.200	75.500
Week - 5	8.840	7.400	81.100
Week - 6	8.890	8.800	83.300
Week - 7	8.950	6.400	79.200
Week - 8	8.990	7.700	85.500
Total	71.340	61.600	646.500

To see the effect of the change to the machine hours base, here is the forecast for the year:

	Direct Labor Hours	Machine hours	Electrical costs
Annual Estimate	428.040	369.600	3.879.000

Required :

1. If using Yearly Estimated Data, calculate the predetermined Overhead Rate on the basis of (a) Direct Labor Hour, and (b) Machine Hour.

2. A new company gets a new job which is estimated to use 350 direct labor hours and 270 machine hours, what is the estimated cost of electricity for this job if it uses (a) the basis of Direct Labor Hour? And what if using (b) Machine Hour basis?

3. Using a Machine hour basis, make a formula for Total Cost which consists of Fixed Cost and Variable Cost.

4. Using formula (3), what is the estimated cost of electricity for a new Job (2)?

5. Which basis is better - Direct Labor Hour, or Machine Hour, and explain why?