Peach Bags (PB) is a designer of high-quality backpacks and purses. Each design
ID: 2607235 • Letter: P
Question
Peach 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:
Peach Bags
Budget for Costs and Activities
For the Year Ended February 28, 2014
Direct materials—purses
$323,200
Direct materials—backpacks
456,000
Direct manufacturing labor—purses
102,400
Direct manufacturing labor—backpacks
99,000
Setup
17,000
Shipping
73,000
Design
166,000
Plant utilities and administration
212,000
Total
$1,448,600
Other budget information follows:
Backpacks
Purses
Total
Number of bags
6,000
3,200
9,200
Hours of production
1,500
2,500
4,000
Number of batches
120
80
200
Number of designs
2
2
4
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.
Peach Bags
Budget for Costs and Activities
For the Year Ended February 28, 2014
Direct materials—purses
$323,200
Direct materials—backpacks
456,000
Direct manufacturing labor—purses
102,400
Direct manufacturing labor—backpacks
99,000
Setup
17,000
Shipping
73,000
Design
166,000
Plant utilities and administration
212,000
Total
$1,448,600
Other budget information follows:
Backpacks
Purses
Total
Number of bags
6,000
3,200
9,200
Hours of production
1,500
2,500
4,000
Number of batches
120
80
200
Number of designs
2
2
4
Explanation / Answer
Answer:
1
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
2
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
Direct material and direct manufacturing labor are costs that can be easily traced to output, which in this case is the number of purses or backpacks produced. Setup and shipping are both a function of the number of batches produced.
Design is related to the number of designs created for each product.
Plant utilities and administration result from general activity level in the plant. Thus, hours of production seems to be an appropriate cost driver.
3
Direct materials—purses
$323,200 ÷ 3200 purses = $101 per purse
Direct materials—backpacks
$456,000 ÷ 6,000 backpacks = $76 per backpack
Direct manufacturing labor—purses
$102,400 ÷ 3200 purses = $32.0 per purse
Direct manufacturing labor—backpacks
$99,000 ÷ 6,000 backpacks = $16.50 per backpack
Setup
$17,000 ¸ 200 batches = $85 per batch
Shipping
$73,000 ¸ 200 batches = $365 per batch
Design
$166,000 ÷ 4 designs = $41,500 per design
Plant utilities and administration
$212,000 ÷ 4,000 hours = $53 per hour
4
Backpacks
Purses
Total
Direct materials
$456,000
$323,200
$779,200
Direct manufacturing labor
99,000
102,400
$201,400
Setup ($85 × 120; 80 batches)
10,200
6,800
$17,000
Shipping ($365 × 120; 80 batches)
43,800
29,200
$73,000
Design ($41.500 × 2; 2 designs)
83,000
83,000
$166,000
Plant utilities and administration
79,500
132,500
$212,000
($53 × 1,500; 2,500 hours)
Budgeted total costs
$771,500
$677,100
$1,448,600
Divided by number of backpacks/purses
÷ 6,000
÷ 3,200
Budgeted cost per backpack/purse
$128.58
$211.59
5
As we can see that, more than 50% of the product cost related to the direct material. So managers must determine whether they can reduced the cost of direct material . if they produce in small lots then it will increases cost like setup and the shipping costs but we can see that they are relatively small components of the product cost, management should evaluate ways for reducing number of setups and cost per setup. from indirect costs, we can see that product- and facility-sustaining costs are the highest. Management must review the design process for savings the cost and they should examine why it takes so long to produce purses relative to backpacks.
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
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.