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 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: (Click the icon to view the budgeted information.) Read the requirements.

Answer 1

1.

• Direct materials- Purses output unit - Level costs
• Direct materials- Backpacks output unit- Level costs
• Direct manufacturing labor - Purses output unit - Level costs
• Direct manufacturing labor - Backpacks output unit - Level costs
• Setup batch - Level costs
• Shipping batch - Level costs
• Design product - Sustaining costs
• Plant utilities & administration facility- Sustaining costs

2.

• Direct materials- Purses - No of purses
• Direct materials- Backpacks - no. Of backpacks
• Direct manufacturing labor- Purses- no. Of purses
• Direct manufacturing labor- Backpacks- no. Of backpacks
• Setup- no. Of batches
• Shipping- no. Of batches
• Design- no. Of designs
• Plant utilities & administration facility- hours of production

Direct materials and Direct manufacturing labor are costs that can be easily traced to output, which in this case is the no. Of purses and backpacks produced.

Setup & Shipping are both a function of the number of batches produced.

Design is related to the no. Of designs related for each product

Plant utilities & administration results from general activity level in the plant. Thus, hours of production seems to be an appropriate cost driver.

3.

Direct materials-Purses	$342,200/2,900	$118
Direct materials- backpacks	$470,850/6,450	$73
Direct manufacturing labor- purses	$87,000/2,900	$30
Direct manufacturing labor- backpacks	$116,100/6,450	$18
Setup	$90,675/195	$465
Shipping	$71,370/195	$366
Design	$165,000/6	$27,500
Plant utilities and administration	$221,000/4,250	$52

4.

Particulars	Backpacks	Purses	Total
Direct materials	$470,850	$342,200	$813,050
Direct manufacturing labor	$116,100	$87,000	$203,100
Setup	$53,475	$37,200	$90,675
Shipping	$42,090	$29,280	$71,370
Design	$110,000	$55,000	$165,000
Plant utilities and administration	$86,580	$134,420	$221,000
Budgeted total	$879,095	$685,100	$1,564,195
No. Of purses / backpacks	6,450	2,900
Cost per unit	$136.29	$236.24

5.

Based on this analysis more than 50% of product costs related to direct materials. Managers should determine whether the material costs can be reduced producing in small lots , increase the setup and shipping costs. While both are relatively small components of product cost. Management may want to evaluate ways to reduce the number of setups and cost per setup.

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