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.

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.

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?

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. 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 - Annual unit delivery and costs Year Delivery Cost Units Delivered 2017 $740 400 2018 $900 500 2019 $850 475 2020 $840 470 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 1,000 m2 $1,000 Timber 6,000 Units $30,000 Foam 1,000 Kilograms $1,000 Button stud 5,000 Units $500 Varnish 1,000 Litres $25,000 Bolt 5,000 Units $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