Petal 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.

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. Petal Bags Budget for Costs and Activities For the Year Ended February 28, 2014 Direct materials purses 342,200 Direct materials-backpacks 470,850 Direct manufacturing labor-purses 87,000 Direct manufacturing labor-backpacks 116,100 Setup 90,675 Shipping 71,370 Design 165,000 221,000 Plant utilities and administration $ 1,564,195 Total Other budget information follows: Total Number of bags Hours of production Number of batches Number of designs Backpacks Purses 6,450 2,900 1,665 2,585 115 80 4 2 $ 9,350 4,250 195 6 Petal 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 Requirement 1. Identify the cost hierarchy level for each cost category. A cost hierarchy categorizes various activity cost pools on the basis of the different types of cost drivers, or cost-allocation bases, or different degrees of difficulty in determining cause-and-effect (or benefits-received) relationships. Activity-based costing (ABC) systems commonly use a cost hierarchy having four levels. The four levels are output unit-level batch-level, product-sustaining, and facility-sustaining costs. Output unit-level costs are related to the number of units. The cost is required for each unit produced. All or most indirect costs are output unit-level costs. In this problem, direct materials and direct labor will use this cost hierarchy. Batch-level costs are related to a group of units of the product. For example, setup and shipping costs are done for a group of units. Product-sustaining costs are costs used to support individual products regardless of the number of units or batches produced. Facility-sustaining costs are costs that can not be traced to individual products but support the company as a whole. Requirement 2. Identify the most appropriate cost driver for each cost category. Explain briefly your choice of cost driver Refer to the information given on the production process. By reviewing the four costs, (setup, shipping, design, and plant utilities and administration), carefully consider the cost driver that applies. Pay close attention to when the equipment needs to be setup and how the bags are shipped. Is it individually, by design, or in a batch? ABC refines a costing system by identifying individual activities as the fundamental cost objects. An activity is an event, task or unit of work with a specified purpose-for example, designing products, setting up machines, operating machines, and distributing products. In this example we have identified four activities: setup, shipping, design, and plant utilities and administration. Each activity has been assigned a cost and we have determined the cost-allocation bases above. There is a seven-step approach to refining a cost system. The first four steps have already been completed. Requirement 3. Calculate the budgeted cost per unit of the cost driver for each cost category. Let's begin with step 5 in the process: compute the rate per unit of each cost-allocation base. Enter the amounts in the formula to determine the rate for each activity. (Round the cost driver rates to four decimal places. Abbreviations used: "util utilities, "admin" administration, "DM" direct materials, "DL" = direct labor.) Cost Cost driver rate . per purse DM-purses DM backpacks Total quantity of cost driver purses backpacks purses . per backpack DL-purses per purse DL-backpacks backpacks T per backpack Setup costs batches per batch Shipping costs batches per batch Design costs designs per design per hour Plant util, and admin. hours Requirement 4. Calculate the budgeted total costs and cost per unit for each product line. Now we can complete step 6, compute the indirect costs allocated to the products, and step 7, compute the total costs of the products by adding all direct and indirect costs assigned to the products. We will begin with computing the costs of the backpacks. Refer to the information given to you to determine the quantity of the cost driver used by the backpacks Cost Driver Rate Quantity of Cost Driver = Backpacks Direct materials Direct labor Setup batches = Shipping batches Design designs Plant utilities and administration hours Total costs Now compute the costs of the purses. Refer to the information given to you to determine the quantity of the cost driver used by the purses. Cost Driver Quantity of Rate * Cost Driver = Purses Direct materials Direct labor Setup batches = Shipping batches Design designs . hours Plant utilities and administration Total costs Finally, calculate the cost per unit of each product using the total costs you calculated above and the production information given to you. (Round the cost per unit amounts to the nearest cent. X.XX.) Cost per bag Total costs + Number of bags produced = Backpacks $ Purses backpacks per backpack purses per purse 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 direct material. Managers should determine whether the material costs can be reduced. Producing in small lots increases 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 the cost per setup. Of the indirect costs, the product-and facility-sustaining costs are the highest. Management should review the design process for cost savings and examine why it takes so long to produce purses relative to backpacks. 1: Data Table * Quently of Clive Backpack CDriver Direct materia Sheping Design Now compute the ces of the purses Refer to the nation to y de the ty of the Quantity of CDiver Rate Co Driver Shipping Design Finally, calculate the cost per unit of each product using the to (Round the cost per un amounts to the nearest c c Based on this is over 50% of product cost relates to direct manages show them reduced Producing in smal lots increases the stand shipping While the mponents of product management may want to eat ways to educe the number of us and the cost per s facility-sustaining costs are the highest Management should ign process to produce purses relackpacks 1: Data Table Pain Bags Budget for Costs and Activit For the Year Ended February 28, 2014 Direct material-pu Direct material backpacks Direct muturing - Direct manufacturing backpacks Sep Shipping Design Total Other budget information w Backpacks Purses Number of bags Hours of production Number of batches Number of designs 2: Require 1. Identity the otherarchy level for each cotcategory 2. the most appropriate cost diver for each cost category Expay your f 3. Ca the budged cost per unit off cost driver for each c 4. Calculate the budgeted total costs and cost per un for each productie 5. Explain how you could use the information in requirement to reduce costs used by the pres Perrin Bags Budget for Costs and Activities For the Year Ended February 28, 2014 Direct materials purses Direct materials-backpacks Direct manufacturing labor-purses Direct manufacturing labor-backpacks Setup Shipping Design Plant utilities and administration Total Other budget information follows: Backpacks Purses Total Number of bags Hours of production Number of batches Number of designs 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. 3: Definition 1. Identify the products that are the chosen cost objects. (Backpacks and Purses) 2. Identify the direct costs of the product. (Direct materials and labor) 3. Select the activities and cost-allocation bases to use for allocating indirect costs to the products. 4. Identify the indirect costs associated with each cost-allocation base