Question

RG Baggins (RG) manufacturers specialty backpacks and handbags (purses). Each design is made in small batches. Each spring, RG comes out with new designs for the backpack and for the handbag. 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, 2017 Direct materials-purses $ 319,155 Direct materials-backpacks 454,995 Direct manufacturing labor-purses 99,000 Direct manufacturing labor-backpacks 113,000 64,000 Shipping 73,000 Design 169,000 Plant utilities and administration 221,000 Total $1,513,150 Setup Other budget information follows: Backpacks Purses Total 3,075 9,250 1,665 2,585 4,250 12080200 Number of bags Hours of production Number of batches Number of designs 6,175 Required 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.

Answer 1

1) Cost Hierarchy

Cost category	Cost Hierarchy Level
Direct material purses	Activities at unit level (These involve activities performed on each unit produced. If a unit is not produced, then this type of activity should not occur.)
Direct material bagpacks
Direct manufacturing labour purses	Activities at unit level (These involve activities performed on each unit produced. If a unit is not produced, then this type of activity should not occur.)
Direct manufacturing labour bagpacks
Setup	Activities at the batch level. (These involve activities performed whenever a batch of units is processed.)
Shipping
Design	Activities at the product level. (These involve activities targeted at a specific product or product line)
Plant utilities and administration	Activities at the facility level. (These involve activities carried out for an entire facility)

2) Allocation of cost driver for each cost category

Cost category	Cost Driver	Reasons
Direct material purses	Number of purses	Since it is directly related to no. of bags produced. If not produced it will not be incurred
Direct material bagpacks	Number of bagpacks	Since it is directly related to no. of bags produced. If not produced it will not be incurred
Direct manufacturing labour purses	Number of purses	Since it is directly related to no. of bags produced. If not produced it will not be incurred
Direct manufacturing labour bagpacks	Number of bagpacks	Since it is directly related to no. of bags produced. If not produced it will not be incurred
Setup	Number of batches	Since setup cost is incurred at the time of new batch
Shipping	Number of batches	Since shipping cost is incurred as soon as batch is completed, it is dispatched. Since data of number of shipments is not available next best cost driver is no. of batches
Design	Number of designs	Since it is directly related to no. of designs made
Plant utilities and administration	Number of production hours	Since it is directly related to hours of production

3) Budgeted cost per unit of cost driver

Cost category	Cost Driver	Total Cost (A)	Total Cost driver (B)	Cost per unit of cost driver (A / B)
Direct material purses	Number of purses	319,155	3075	34.50
Direct material bagpacks	Number of bagpacks	454,995	6175	49.19
Direct manufacturing labour purses	Number of purses	99,000	3075	10.70
Direct manufacturing labour bagpacks	Number of bagpacks	113,000	6175	12.22
Setup	Number of batches	64,000	200	320.00
Shipping	Number of batches	73,000	200	365.00
Design	Number of designs	169,000	4	42,250.00
Plant utilities and administration	Number of production hours	221,000	4250	52.00

4) Budgeted total cost and cost per unit for each product line

Cost category	Cost Driver	Cost per unit of cost driver (A)	Purse (B)	Bagpacks ('C)	Allocation to Purse (A X B)	Allocation to Bagpacks (A X C)	Total Cost
Direct material purses	Number of bags	103.79	3,075		319,155	-	319,155
Direct material bagpacks	Number of bags	73.68		6,175	-	454,995	454,995
Direct manufacturing labour purses	Number of bags	32.20	3,075		99,000	-	99,000
Direct manufacturing labour bagpacks	Number of bags	18.30		6,175	-	113,000	113,000
Setup	Number of batches	320.00	80	120	25,600	38,400	64,000
Shipping	Number of batches	365.00	80	120	29,200	43,800	73,000
Design	Number of designs	42,250.00	2	2	84,500	84,500	169,000
Plant utilities and administration	Number of production hours	52.00	2,585	1,665	134,420	86,580	221,000
Total Cost (D)					691,875	821,275
Number of units (E)					3075	6175
Cost per unit (D / E)					225	133