Best Waves, Inc., is a manufacturer of stand-up paddle boards and uses standard costing. Manufacturing overhead (both variable and fixed) is allocated to products on the basis of budgeted machine-hours. In 2021, budgeted fixed manufacturing overhead cost was $17,000,000. Budgeted variable manufacturing overhead was $10 per machine-hour. The denominator level was 1,000,000 machine-hours. Specific requirements are:

Prepare a graph for fixed manufacturing overhead. The graph should display how the companys fixed manufacturing overhead costs will be depicted for the purposes of planning and control as well as inventory costing. See page 283 of the textbook for an example.

Suppose that 1,125,000 machine-hours were allowed for actual output produced in 2021, but 1,200,000 actual machine hours were used. Actual manufacturing overhead was $12,075,000, variable and $17,100,000 fixed. Compute (a) the variable manufacturing overhead spending and efficiency variances and (b) the fixed manufacturing overhead spending and production-volume variances.

Prepare the journal entries to record (a) the transactions with the associated variances for 2021. Use manufacturing overhead control, manufacturing overhead allocated and work-in-process for both variable and fixed overhead. (b) close out the balances of work-in-process to finished goods inventory and (c) charge off the variances to a period expense account.

Discuss and consider a recommendation for the treatment of overhead costs. In particular indicate how the denominator level chosen impacts the cost of the finished product. Note the negative aspects of using an allocation rate based on a given denominator level since management has options of which denominator level to use.