Benny is reviewing the activities for the past year, 2021. Stylish Chairs rents a small administrative office in Melbourne's central business district (CBD) for $45,000 per year and a large warehouse in Geelong for $75,000 per year. 1 This is the additional reading for this unit. A copy of the document is available at https://www.cimaglobal.com/Professionalism/Ethics/CIMA-code-of-ethics-for-professional-accountants/ Page 4 of 9 Stylish Chairs has a staff handling all the administrative work in the office in CBD and pays the staff with an annual salary of $75,000. Stylish Chairs has hired a professional marketing firm for managing the sales and this marketing firm charges a commission of $10 for each completed sale; each sale equals one chair sold. The invoicing system used by Stylish Chairs is outsourced and for each sale completed the outsourced firm charges $5; each sale equals one chair sold. The miscellaneous cost that incurred in the administrative office was $5,000, mostly costs with the lease of material and stationery, and this yearly cost is expected to remain the same amount for years to come. In the warehouse in Geelong there is one full-time employee who gets paid $90,000 per year for supervising the casual staff working in the warehouse. The warehouse had miscellaneous costs of $5,000 in the past year and is expected to remain the same amount for years to come. Stylish Chairs has a contract with a delivery firm for delivering the chair to their clients, but Benny is not able to find the contract and is not sure how much the delivery firm charges. The only information he can gather is regarding the past few years: Table 1 - Annualunit delivervondente very and Year Delivery Cost Units Delivered 2017 2018 2019 2020 $740 $900 $850 $840 400 500 475 470 Below is a table listing all the material used during the past year to manufacture 500 chairs and the costs incurred. There was no stock or work in process in the beginning or end of the year. Table 2 - Material costs Material Quantity Total Cost Fabric Timber Foam Button stud Varnish Bolt 1,000 m2 6,000 Units 1,000 kilograms 5,000 Units 1,000 Litres 5,000 Units $1,000 $30,000 $1,000 $500 $25,000 $1,000 The manufacturing activity is made by casual staff. The first stage is the woodworking, where a carpenter is hired by $30 per hour for working with the timber. This task is very labour intensive and for preparing the material a carpenter takes 4 hours per chair. Once the timber is ready for being assembled, a casual staff is paid $20 per hour for assembling the chair with the bolts and then adding the padding (fabric, foam, and button studs). The assembling takes only 2 hours per chair. The final stage of manufacturing is varnishing the chair. A casual staff is paid $25 per hour for varnishing the chair and this task takes 1 hour. Question 4 In the current year, Benny was approached by a restaurant owner who wants to purchase 75 chairs to furnish the refurbished restaurant. Benny wants to know the manufacturing costs for this job, considering Stylish Chairs has a production budget of 600 chairs for the current year. For allocating the manufacturing overhead (i.e., indirect cost pool), Stylish Chairs uses the direct labour hours for assembling and woodwork (i.e., cost- allocation base), but Benny is struggling with how to apply job costing to the product cost of these chairs and thus has asked for your help. Required a) Regarding this specific job, calculate per unit direct manufacturing cost, the manufacturing overhead rate per allocation base, the indirect manufacturing costs, and the total manufacturing cost for this order. (Job costing in manufacturing, Chapter 3, 5 marks) b) Considering the industry benchmark for estimating the manufacturing overhead for similar jobs is calculated using 200% of direct material cost, identify whether this job has a manufacturing overhead lower or higher than a similar job using the industry benchmark. Briefly explain what could cause a difference. (Job costing in manufacturing, Chapter 3, 5 marks) c) The restaurant owner offers $800 per chair, which he claims is much higher than the product cost for these chairs. Considering the actual figures for the current year follow what has been budgeted, will Stylish Chairs be profitable if Benny uses the $800 as the selling price for all sales during the current year? Use your calculations for supporting your argument. When the selling price is higher than the per-unit product cost, will the business always be profitable? (Chapter 2, 10 marks) Page 6 of 9 Question 5 Stylish Chairs has a production budget of 600 chairs for the current year and for allocating the manufacturing overhead (i.e., indirect cost pool). Stylish Chairs uses the direct labour-hours for assembly and woodwork (carpenter) to allocate manufacturing overhead. Benny is not sure whether the production budget will be met and some of its consequences. Required a) If the quantity produced in the current year reaches the budgeted amount of 600 chairs whereas in the past year the production was 500 chairs, Benny says the per unit product cost in the current year will increase when compared to the previous year because the production has increased. Is Benny right or wrong in his statement and why? Use calculations for supporting your argument. (Chapter 2, 10 marks) b) Considering Stylish Chairs uses budgeted indirect costs during the year, if the quantity produced in the current year is only 550 chairs whereas the production budget for the current year is 600 chairs, Benny says there will be an overallocation of indirect costs. Is Benny right or wrong in his statement? What could lead to an overallocation or underallocation of indirect costs specifically for the chair? Use calculations for supporting your argument. (Budgeted indirect costs and end-of-period adjustments, Chapter 3, 10 marks) Question 6 To diversity its product line and meet the needs of different customers, Benny wants to propose two new products for Stylish Chairs, the Ultra-Cool Chair and the Super-Shinny Chair. These new products are the standard chair with padding manufactured by Stylish Chairs with some additional work on them. For the Ultra- Cool Chair, an extra layer of varnish is applied, and for the Super-Shinny Chair, no extra layer of varnish is applied but extra shiny bolts are added. Regarding the Ultra-Cool Chair, adding another layer of varnish takes an additional 2 hours of direct manufacturing activity (varnishing) for each chair; the additional layer of varnish requires 1 litre of fancy varnish for each chair. This fancy varnish is 50% more expensive than the normal varnish used for the standard product. Regarding the Super-Shinny Chair, adding the extra shiny bolts takes an additional 1 hour of assembly for each chair and 10 additional shiny bolts for each chair. These shiny bolts are 200% more expensive than the normal bolts used for the standard product. Considering that a unit of the standard chair with padding is sold by $900 per unit, Benny says the Ultra-Cool Chair could be sold by $1,000 so Stylish Chairs would make more money with this new product. However, Benny is not sure which price would be appropriate for the Super-Shinny Chair. Required You have been asked to crunch the numbers and show whether it is worth processing the standard chair into the Ultra-Cool Chair and selling it for $1,000. Benny also wants to know which is the minimum price Stylish Chairs should charge for a Super-Shinny Chair for it being worth processing further from a standard chair. (Sell or process further chanter 10 marks