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

a) Identify the cost hierarchy level for each cost category.
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 and administration	Facility-sustaining costs
b) Identify the most appropriate cost driver for each cost category.
Direct materials-purses	Number of purses
Direct materials — backpacks	Number of backpacks
Direct manufacturing labor—purses	Number of purses
Direct manufacturing labor—backpacks	Number of backpacks
Setup	Number of batches
Shipping	Number of batches
Design	Number of designs
Plant utilities and administration	Hours of production
c)
Direct materials—purses = $319,155 ÷ 3,075 purses	$                     103.79	per purse
Direct materials—backpacks = $454,995 ÷ 6,175 backpacks	$                       73.68	Per bagpack
Direct manufacturing labor—purses = $99,000 ÷ 3,075 purses =	$                       32.20	per purse
Direct manufacturing—backpacks = $113,000 ÷ 6,175 backpacks	$                       18.30	Per bagpack
Setup = $64000 ÷ 200 batches	$                     320.00	per batch
Shipping = $73000 ÷ 200 batches	$                     365.00	per batch
Design = $169,000 ÷ 4 designs	$                42,250.00	per design
Plant utilities and administration = $221,000 ÷ 4,250 hours	$                       52.00	Per hour
d)
	Purses	Backpacks	Total
Direct materials	$              319,155.00	$ 454,995.00	$     774,150.00
Direct manufacturing labor	$                99,000.00	$ 113,000.00	$     212,000.00
Setups = 120 x $320 ; 80 x $320	$                38,400.00	$   25,600.00	$       64,000.00
Shipping =  120 x $365 ; 80 x $365	$                43,800.00	$   29,200.00	$       73,000.00
Design = 42,250 x 2 ; 42,250 x 2	$                84,500.00	$   84,500.00	$     169,000.00
Plant utilities and administration = $52 x 1665 ; $52 x 2585	$                86,580.00	$ 134,420.00	$     221,000.00
Budgeted total costs	$              671,435.00	$ 841,715.00	$  1,513,150.00
Divided by number of backpacks/purses	÷ 6175	÷ 3075
Budgeted cost per backpack/purse	$                     108.73	$        273.73