Problem - Choosing cost drivers, activity-based costing, activity-based management. Pastel Bags (PB) is a designer of high-quality backpacks and purses. Each design is made in small batches. Each 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. When 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 as follows:
Pastel Bags
Budget for Costs and Activities
For the Year Ended February 28, 2014
Direct materials-purses $ 319,155
Direct materials-backpacks 454,995
Direct manufacturing labor-purses 99,000
Direct manufacturing labor-backpacks 113,000
Setup 64,000
Shipping 73,000
Design 169,000
Plant utilities and administration 221,000
Total $1,513,150
Other budget information follows:
Backpacks Purses Total
Number of bags 6,175 3,075 9,250
Hours of production 1,665 2,585 4,250
Number of batches 120 80 200
Number of designs 2 2 4
1. Identify the cost hierarchy level for each cost category.
2. Identify the most appropriate cost driver for each cost category. Explain briefly your choice of cost driver.
3. Calculate the budgeted cost per unit of cost driver for each cost category.
4. Calculate the budgeted total costs and cost per unit for each product line.
5. Explain how you could use the information in requirement 4 to reduce costs.