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) Design costs (7) Plant util. and admin. (8) Requirement 4. Calculate the budgeted total costs and cost per unit for each product line. Backpacks Purses Direct materials Direct labor Setup Shipping Design Plant utilities and administration Total costs The cost per backpack is and the cost per purse is Requirement 5. Explain how you could use the information in requirement 4 to reduce costs. Based on this analysis, over 50% of product cost relates to (9) Producing in small lots will (10) Management may want to evaluate ways to reduce the smaller components like the (11) to further reduce costs. Finally, management should review the design process for cost savings and examine why it takes so long to produce (12) 1: Data Table Pink Bags Budget for Costs and Activities For the Year Ended February 28, 2014 $ 393,750 466,200 94,500 Direct materials-purses Direct materials-backpacks Direct manufacturing labor-purses Direct manufacturing labor-backpacks Setup Shipping Design 119,700 21,420 70,980 163,000 Plant utilities and administration 208,000 $ 1,537,550 Total Other budget information follows: Purses Total Backpacks 6,300 3,150 9,450 1,525 Number of bags Hours of production Number of batches Number of designs 2,635 4,160 135 75 210 3 2 5 2: 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. (1) O 0000 O per hour per backpack O per purse per batch per design O per hour O per purse (2) O O per backpack O per batch O per design (4) (3) O O per hour O per backpack O per purse per batch O per design O per hour O per backpack O per purse O per batch O per design (5) O per hour per backpack Oper purse O per batch O per design (6) O O per hour O per backpack per purse O per batch O per design ccounting (7) per hour (8) per hour per purse per backpack per batch per design per backpack O per purse per batch per design design. direct labor. direct materials. plant utilities and administration. setup. shipping. (10) decrease the design costs. decrease the direct materials costs. decrease the setup and shipping costs. increase the design costs. increase the direct materials costs. increase the setup and shipping costs. (11) (12) hours of production for plant utilities and administration level of output of purses and backpacks number of setups and the cost per setup backpacks relative to purses. O purses relative to backpacks