Question

Payton 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:

Payton Bags
Budget for Costs and Activities
For the Year Ended February 28, 2014
Direct materials—purses	$342,200
Direct materials—backpacks	470,850
Direct manufacturing labor—purses	87,000
Direct manufacturing labor—backpacks	116,100
Setup	90,675
Shipping	71,370
Design	165,000
Plant utilities and administration	221,000
Total	$1,564,195

Other budget information​ follows:

	Backpacks	Purses	Total
Number of bags	6,450	2,900	9,350
Hours of production	1,665	2,585	4,250
Number of batches	115	80	195
Number of designs	4	2	6

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.

Answer 1