Question

Posie

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 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:

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Requirement 1. Identify the cost hierarchy level for each cost category.

Cost	Cost Hierarchy Level
Direct materials—purses	Output unit-level cost
Direct materials—backpacks	Output unit-level cost
Direct labor—purses	Output unit-level cost
Direct 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

Requirement 2. Identify the most appropriate cost driver for each cost category. Explain briefly your choice of cost driver.

Cost	Cost Driver	Reason
Direct materials—purses	Number of purses
Direct materials—backpacks	Number of backpacks
Direct labor—purses	Number of purses
Direct labor—backpacks	Number of backpacks
Setup	Number of batches
Shipping	Number of batches
Design	Number of designs
Plant utilities and administration	Hours of production

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Data Table

Posie Bags
Budget for Costs and Activities
For the Year Ended February 29, 2020
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

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Requirements

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

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