Accounting 26th Edition by Carl Warren ,Jim Reeve ,Jonathan Duchac

Exercise 39

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:

In teams:
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.