Question

4. Pink 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 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 Requirement 1. Identify the cost hierarchy level for each cost category. Cost Cost Hierarchy Level Output unit-level cost Output unit-level cost Direct materials purses Direct materials-backpacks Direct labor-purses Direct labor-backpacks Output unit-level cost Output unit-level cost Batch-level cost Setup Batch-level cost Shipping Design Product-sustaining cost Facility-sustaining cost Plant utilities and administration Requirement 2. Identify the most appropriate cost driver for each cost category. Explain briefly your choice of cost driver. Cost Direct materials-purses Direct materials-backpacks Direct labor-purses Direct labor-backpacks Setup Shipping Design Plant utilities and administration Cost Driver Reason Number of purses The cost is determined by the number of output. Number of backpacks The cost is determined by the number of output. Number of purses The cost is determined by the number of output. Number of backpacks The cost is determined by the number of output. Number of batches The cost is determined by the number of batches. Number of batches The cost is determined by the number of batches. Number of designs The cost is determined by the number of designs. Hours of production The more the machines are used the higher the cost. Requirement 3. Calculate the budgeted cost per unit of cost driver for each cost category. (Round the cost driver rates to four decimal places. Abbreviations used: "util." = utilities, "admin" = administration, "OM" = direct materials, "DL" = direct labor.) Cost - Total quantity of cost driver Cost driver rate = (1) DM-purses DM-backpacks DL-purses (2) = (3) DL-backpacks (4) Setup costs Shipping costs (5) (6)

Answer 1

3			Cost	/	Total quantity of cost driver	=	Cost driver rate
	DM-purses		393750		3150		125	(1).	Per purse
	DM-backpacks		466200		6300		74	(2).	Per backpack
	DL-purses		94500		3150		30	(3).	Per purse
	DL-backpacks		119700		6300		19	(4).	Per backpack
	Setup costs		21420		210		102	(5).	Per batch
	Shipping costs		70980		210		338	(6).	Per batch
	Design costs		163000		5		32600	(7).	Per design
	Plant util. and admin.		208000		4160		50	(8).	Per hour
4					Backpacks		Purses
	Direct materials				466200		393750
	Direct labor				119700		94500
	Setup				13770		7650
	(No.of batches*Cost driver rate)				(135*102)		(75*102)
	Shipping				45630		25350
	(No.of batches*Cost driver rate)				(135*338)		(75*338)
	Design				97800		65200
	(No.of designs*Cost driver rate)				(3*32600)		(2*32600)
	Plant utilities and administration				76250		131750
	(Hours*Cost driver rate)				(1525*50)		(2635*50)
	Total costs				819350		718200
	Cost per backpack=Total costs/Number of bags of backpacks=819350/6300=$ 130.0556
	Cost per purse=Total costs/Number of bags of purses=718200/3150=$ 228
5	(9). Direct materials
	(10). Increase the setup and shipping costs
	(11). Number of setups and the cost per setup
	(12). Purses relative to backpacks