Question 5

Stylish Chairs has a production budget of 500 chairs for the current year and for allocating the manufacturing

overhead (i.e., indirect cost pool) Stylish Chairs uses the direct labour-hours (i.e., cost-allocation base). Roland

and Curt are 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 500 chairs whereas in

the past year the production was 600 chairs, Manny says the unit product cost in the current year will

increase when compared to the previous year because the production has decreased. Is Manny right

or wrong in his statement and why? Use calculations for supporting your argument.