Choosing cost drivers, activity-based costing, activity-based management. Pumpkin 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: For the Year Ended February 28, 2014
Direct materials purses 334750
Direct materials- backpacks 456300
Direct manufacturing labor purses 97500
Direct manufacturing labor-backpacks 117000
Setup 51750
Shipping 72000
Design 162500
Plant utilities and administration 253500
Total 1545300
Other budget information follows:
Backpacks Purses Total
Number of bags 5850 3250 9100
Hours of production1600 2625 4225
Number of batches 163 62 225
Number of designs 2 3 5
Other budget information follows:
1. Identify the cost hierarchy level for each cost category. Required
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 reducecosts.