PROBLEMS Problem 7-33 Functional-Based versus Activity-Based Costing or years, Sierra Grande Company produced only one product: backpacks. Recently, the c decided to add a line of duftel bags. With this addition, the company began assigning o osts by using departmental rates. (Prior to this, the company used a predetermined pla 2 ead rmined plantwide rate based on units produced.) Departmental rates meant that overhead costs had to be assigned to h producing department in order to create overhead pools so that predetermined departmenti rates could be calculated. Surprisingly, after the addition of the duffel-bag line and the switch to departmental rates, the costs to produce the backpacks increased, and their profitability dropped The marketing manager and the production manager both complained about the increase in the production cost of backpacks. The marketing manager was concerned because the increase in unit costs led to pressure to increase the unit price of backpacks. She was resisting this pressure because she was certain that the increase would harm the company's market share. The produs tion manager was receiving pressure to cut costs also, yet he was convinced that nothing different was being done in the way the backpacks were produced. He was also convinced that further an- efficiency in the manufacture of the backpacks was unlikely. After some discussion, the twon that the problem had to be connected to the addition of the duffel-bag line. Upon investigation, they were informed that the only real change in product costing procedurs overhead costs were assigned to the two producing departments: patterns and finishing. Some was in the way overhead costs were being assigned. A two-stage procedure was now in use. Fin st. NEL