Stylish Chairs has a production budget of 600 chairs for the current year and for allocating the manufacturingoverhead (i.e., indirect cost pool) Stylish Chairs uses the direct labour-hours (i.e., cost-allocation base). Anni- Frid and Benny 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 600 chairs whereas in the past year the production was 500 chairs, Bjrn says the unit product cost in the current year will decrease when compared to the previous year because the production has increased. Is Bjrn right or wrong in his statement and why? (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 500 chairs whereas the production budget for the current year is 600 chairs, Bjrn says there will be an overallocation of indirect costs. Is Bjrn right or wrong in his statement and why?