Pink 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:

Pink Bags
Budget for Costs and Activities
For the Year Ended February 28, 2014
Direct materials – purses $431,725
Direct materials – backpacks 428,775
Direct manufacturing labor – purses 109,800
Direct manufacturing labor – backpacks 115,050
Setup 66,150
Shipping 73,500
Design 167,500
Plant utilities and administration 225,500
Total $1,618,000
Other budget information follows:
Backpacks Purses Total
Number of bags 5,900 3,600 9,500
Hours of production 1,550 2,550 4,100
Number of batches 145 65 210
Number of designs 3 2


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.

Explain how you could use the information in requirement 4 to reduce costs.