5-38 (Choosing cost drivers, activity-based costing, activity-based management.) Pastel 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 pro-duction 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:

Pastel Bags
Budget for Costs & Activities
For the Year Ended Feb. 28, 2017
Direct Material - Purses				$319,155
Direct Material - Backpacks				$454,995
Direct Manufacturing Labor - Purses				$99,000
Direct Manufacturing Labor - Backpacks				$113,000
Setup				$64,000
Shipping				$73,000
Design				$169,000
Plant Utilities & Admin				$221,000
Total				$1,513,150

Other budget information follows:

		Backpacks	Purses	Total
Number of Bags		6,175	3,075	9250
Hours of Production		1,665	2,585	4250
Number of Batches		120	80	200
Number of Designs		2	2	4

Show an calculations for the following:

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.