Question

First Björn is examining the activities for the past year. Stylish Chairs rents a small administrative office in Melbourne's central business district (CBD) for $20,000 per year and a large warehouse in Dandenong for $30,000 per year.

The cost with staff in the administrative office in the CBD handling all the bureaucracy is $100,000 per year. Stylish Chairs has hired a firm for managing the sales and this firm charges a commission of $70 for each completed sale. The invoicing system used by Stylish Chairs is outsourced and for each sale completed the firm charges $1. The administrative office had in the past year other miscellaneous costs of $4,000, mostly costs with the lease of material and stationery, and this yearly cost is expected to remain the same amount for years to come.

A full-time employee gets paid $80,000 per year for supervising the casual staff working in the warehouse in Dandenong. Like the administrative office, the warehouse had other 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 copies of the 18th-century rococo chair to their clients, but Björn is not able to find the contract and is not sure how much the firm charges per transaction. The only information he can gather is regarding past year’s quarterly costs:

Table 1 – Quarterly delivery costs

Quarter	Delivery Cost	Units Delivered
First	$360	125
Second	$400	150
Third	$340	125
Quarter	$300	100
Total	$1,400	500

Below is a table listing all the material used during the past year to manufacture 500 copies of 18th century rococo 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	1,500 m2	$3,000
Timber	6,000 Units	$36,000
Foam	500 Kilograms	$150
Button stud	4,500 Units	$450
Varnish	500 Litres	$10,000
Bolt	5,000 Units	$500

The manufacturing activity is made by casual staff. The first stage is the woodworking, where a carpenter is hired by $35 per hour for working with the timber. This task is very labour intensive and for preparing the material a carpenter takes 5 hours per chair. Once the timber is ready for being assembled a casual staff is paid $25 per hour for assembling the chair with the bolts and adding the paddings (fabric, foam, and button studs). The assembling takes only 1 hour per chair. The final stage of manufacturing is varnishing the chair. A casual staff is paid $35 per hour for varnishing the chairs and this task takes 2 hours.

Required

1. a) Björn is having some trouble crunching the numbers and has asked for your help identifying and classifying all the costs between (a) fixed, mixed, or variable, (b) direct or indirect, and (c) product cost or period cost. (Chapter 2, 10 marks)

2. b) Use the high-low method for estimating the cost function for annual delivery costs. (Chapter 9, 10 marks)

3. c) Björn is also having trouble computing the total product cost and unit product cost for the past year and asked for your help in calculating the total product cost and unit product cost for the past year for Stylish Chairs. (Chapter 2, 10 marks)

Question 2

To have a better picture of what has happened during the previous year Anni-Frid and Benny want to see Stylish Chairs operating profit, and Björn has asked for your help preparing this information. The copies of the 18th-century rococo chair are sold for $1,000 each.

Required

1. a) Prepare a variable-costing income statement for the previous year for Stylish Chairs. (e.g., Panel A,

   Exhibit 7.3, Chapter 7, 5 marks)

2. b) Prepare an absorption-costing income statement for the previous year for Stylish Chairs. (e.g., Panel

   B, Exhibit 7.3, Chapter 7, 5 marks)

Question 3

In the current year, Anni-Frid and Benny were approached by Agnetha who wants to buy 20 copies of the 18thcentury rococo chair. Anni-Frid and Benny want 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 (i.e., cost-allocation base), but Björn is struggling with job costing in manufacturing and has asked for your help.

Required
a) Calculate the direct manufacturing costs, the indirect manufacturing costs, and the total manufacturing costs of this job. (Job costing in manufacturing, Chapter 3, 10 marks)

b) Considering the current cost-allocation base of direct labour-hours and using a direct allocation method, which of the three activities (assembling, woodworking, and varnishing) has the higher allocated manufacturing overhead and why? (Direct allocation method, Chapter 5, 10 marks)

Answer 1

Question 1(a):

Classification of costs

	Fixed cost		Variable cost		Mixed cost
		$		$		$
1	Office rent	$     20,000.00	Sales comission	$ 70 per sale	Misc. cost of office	$ 4,000.00
2	Warehouse rent	$     30,000.00	Invoice generation cost	$ 1 per sale	Misc. cost of warehouse	$ 5,000.00
3	Administrative staff	$ 1,00,000.00	Material cost	$ 50100	delivery costs	$ 1,400.00
4	Salary to supervior	$     80,000.00	Labor cost - carpenter	$35 per hour
5			Labor cost - assembling	$ 25 per hour
6			Labor cost - varnishing	$ 35 per hour
7
	Direct cost		Indirect cost
1	Direct Material cost		Indirect material
	Fabric	$       3,000.00	Varnish	$      10,000.00
	Timber	$     36,000.00	Bolt	$            500.00
	Foam	$           150.00
	Button stud	$           450.00
2	Labor cost		Warehouse rent	$      30,000.00
	Woodworking	$     87,500.00
	Assembling	$     12,500.00
	Varnishing	$     35,000.00
3	delivery cost	$       1,400.00	Admin. Cost	$ 1,00,000.00
4	Sales commision	$     35,000.00	Salary to supervisor	$      80,000.00
5	Invoice generation cost	$           500.00	Misc. cost of office	$        4,000.00
6			Misc. cost of warehouse	$        5,000.00
7			Office rent	$      20,000.00
Product costs are costs necessary to produce a product, while period costs are non-production costs that are expensed within an accounting period.
	product cost		Period cost
1	Material cost	$     50,100.00	Office rent	$      20,000.00
2	Labor cost	$ 1,35,000.00	Warehouse rent	$      30,000.00
3	Delivery cost	$       1,400.00	Admin. Cost	$ 1,00,000.00
4	Sales commision	$     35,000.00	Salary to supervisor	$      80,000.00

Question 1(b): Estimation of the cost function for annual delivery cost by using high-low method.

High-low method is the method to separate fixed cost and variable cost.

The formula for finding variable cost per unit is

  

Hence, in this case, variable cost per unit is

Variable cost per unit= ($ 400 - $ 300) / (150 units - 100 units)

Variable cost per unit = $ 2 per unit

Now we can find fixed cost by using variable cast per unit.

Fixed cost = Total cost - ( Variable cost per unit X Total activity units)

Fixed cost = $ 1400 - ( $ 2 per unit X 500 units)

Fixed cost = $ 400

Hence, Variable delivery cost = $ 1000

Fixed delivery cost = $ 400

Quetion 1(c):

Statement to calculate total product cost and unit cost
			Particulars	Total cost	Unit cost
Direct Materials consumed	$     39,600.00
Add: Direct Labor	$ 1,35,000.00
Prime cost	$ 1,74,600.00
Add: Factory OH
Indirect materials	$     10,500.00
Warehouse rent	$     30,000.00
Misc. cost of warehouse	$       5,000.00
Factory cost	$ 2,20,100.00	$ 440.20
Add: Office and Admin OH
Admin. Cost	$ 1,00,000.00
Salary to supervisor	$     80,000.00
Misc. cost of office	$       4,000.00
Office rent	$     20,000.00
Cost of goods sold	$ 4,24,100.00	$ 848.20
Add: Sellind and distribution OH
delivery cost	$       1,400.00
Sales commision	$     35,000.00
Invoice generation cost	$           500.00
Cost of sales	$ 4,61,000.00	$ 922.00