Bagsâ (PB) is a designer ofâ high-quality backpacks and purses. Each design is made in small batches. Eachâ spring, PB comes out with new designs for the backpack and for the purse. The company uses these designs for a year and then moves on to the next trend. The bags are all made on the same fabrication equipment that is expected to operate at capacity. The equipment must be switched over to a new design and set up to prepare for the production of each new batch of products. Whenâ completed, each batch of products is immediately shipped to a wholesaler. Shipping costs vary with the number of shipments. Budgeted information for the year is asâ follows: Direct materialsâpurses 319155
Direct materialsâbackpacks 454995
Direct manufacturing laborâpurses 99000
Direct manufacturing laborâbackpacks 113000
Setup 64000
Shipping 73000
Design 169000
Plant utilities and administration 221000
Total 1513150

Backpacks Purse Total
Number of bags 6175 3075 9250
Hours of production 1665 2585 4250
Number of batches 120 80 200
Number of designs 2 2 4

Required:
a. Identify the cost hierarchy level for each cost category.
b. Identify the most appropriate cost driver for each cost category. Explain briefly your choice of cost driver.
c. Calculate the budgeted cost per unit of cost driver for each cost category.
d. Calculate the budgeted total costs and cost per unit for each product line.
e. Explain how you could use the information in requirement 4 to reduce costs.

a. Identify the cost hierarchy level for each cost category.

Direct materials purses  ⇒ Output unit-level cost

Direct materials backpacks ⇒  Output unit-level cost

Direct manufacturing labor purses ⇒  Output unit-level cost

Direct manufacturing labor backpacks  ⇒ Output unit-level cost

Setup ⇒  Batch-level cost

Shipping  ⇒ Batch-level cost

Design  ⇒ Product-sustaining cost

Plant utilities and administration ⇒ Facility-sustaining cost

b.

Setup $64,000  ⇒ number of batches (it's a batch level cost)

Shipping $73,000   ⇒ number of batches (it's a batch level cost)

Design $169,000   ⇒ number of designs (it's logical, design costs must be allocated based on the number of designs)

Plant utilities and administration $221,000  ⇒ hour of production (it involves the whole manufacturing process)

c.

Setup $64,000  / 200 batches = $320 per batch

Shipping $73,000  / 200 batches = $365 per batch

Design $169,000   / 4 designs = $42,250 per design

Plant utilities and administration $221,000  / 4,250 production hours = $52 per production hour

                            backpacks              purses                    total

Setup                    $38,400                $25,600               $64,000

Shipping               $43,800                $29,200               $73,000

Design                  $84,500                $84,500             $169,000  

Plant U&A            $86,580                 $134,420            $221,000

totals                  $253,280                $273,720           $527,000

d.

total production costs for backpacks = $454,995 + $113,000 + $253,280 = $821,275

production costs per unit = $821,275 / 6,175 = $133 per backpack

total production costs for purses = $319,155 + $99,000 + $273,720 = $691,875

production costs per unit = $691,875 / 3,075 = $225 per purse

e. in order to reduce setup and shipping costs, the company needs to produce in larger batches so the total number of batches decreases.

hardwork and determination