Question 5-38 is a review question that I need to answer so I can complete my assignment. It requires identifying the cost hierarchy, the cost drivers for each category, and calculating budgeted costs. The entire problem and requirements are on the attachment.
Pates for each of the five activity areas.
3. Use the activity-based costing information to allocate the $301,080 of “other operating costs” to each
of the market segments. Compute the operating income for each market segment.
4. Comment on the results. What new insights are available with the activity-based costing information?
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 and Activities
For the Year Ended February 28, 2017
Direct materials—purses
Direct materials-backpacks
Direct manufacturing labor-purses
Direct manufacturing labor-backpacks
Setup
Shipping
Design
Plant utilities and administration
Total
$ 319,155
454,995
99,000
113,000
64,000
73,000
169,000
221,000
$1,513,150
TEATER THE
ASSIGNMENT MATERIAL
193
Other budget information follows: ?? ?? 9& E3 82 ? ? ?? ?? ?da des
TEGREERS NEED
Backpacks Purses Total
Number of bags
6,175 3,075 9,250
er
Hours of production
1,665
2,585 4,250
Todo
Number of batches
120
80 200
Number of designs
2
2
4
Required
1. Identify the cost hierarchy level for each cost category.
Lee
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.
5-39 ABC, health care. Crosstown Health Center runs two programs: drug addict rehabilitation and after-
care (counseling and support of patients after release from a mental hospital). The center’s budget for 2017
follows.
Professional salaries:
4 physicians x $150,000
$600,000
12 psychologists x $75,000
900,000
16 nurses X $30,000
HECHT
480,000 $1,980,000
Medical supplies
242,000
Rent and clinic maintenance
138,600
Administrative costs to manage patient charts, food, laundry
484,000
Laboratory services
92,400
Total
$2,937,000
Kim Yu, the director of the center, is keen on determining the cost of each program. Yu compiles the follow-
ing data describing employee allocations to individual programs:
12
Drug Aftercare Total Employees
Physicians
4
4
Psychologists 4
8
Nurses
6
10
16
Yu has recently become aware of activity-based costing as a method to refine costing systems. She asks
her accountant, Gus Gates, how she should apply this technique. Gates obtains the following budgeted
information for 2017:

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