Stylish Chairs is a small company which makes and sells copies of an 18th-century rococo chair. The company is managed by Benny, and you are an intern working at Stylish Chairs.

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 m	$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.

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

1. 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.
2. 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.