Mastery Problem: Activity-Based Costing WoolCorp Single Plantwide Rate Activity-Based Costing Final Question WoolCorp WoolCorp buys sheep's wool from farmers. The company began operations in January of this year, and is making decisions on product offerings, pricing, and vendors. The company is also examining its method of assigning overhead to products. You've just been hired as a production manager at WoolCorp. Currently WoolCorp makes two products: (1) raw, clean wool to be used as stuffing insulation and (2) wool yarn for use in the textile industry. The company would like you to evaluate its costing methods for its raw wool and wool yarn. Single Plantwide Rate WoolCorp is currently using the single plantwide factory overhead rate method, which uses a predetermined overhead rate based on an estimated allocation base such as direct labor hours or machine hours. The rate is computed as follows: Single Plantwide Factory Overhead Rate = (Total Budgeted Factory Overhead) = (Total Budgeted Plantwide Allocation Base) WoolCorp has been using combing machine hours as its allocation base. The company would like to consider activity-based costing. In order to understand their current system better, you evaluate WoolCorp's current method of costing for raw wool and wool yarn. The production staff has compiled the following information for you on the production of 500 pounds of either raw wool or wool yarn: Factory Overhead Type Budgeted Factory Overhead $25,600 Sorting Cleaning 38,400 Combing 1,200 Raw Wool Wool Yarn Hours of combing machine use required 70 30 In the following table, use combing machine hours as the allocation base for assigning overhead costs to each product. When required, round your answers to the nearest dollar. Single Plantwide Factory Overhead Rate: $ per combing hour Raw Wool Wool Yarn Allocated factory overhead cost $ In order to compare WoolCorp's current method with activity-based costing, you interview the production staff and compile the following information, which relates to the costs for raw wool and wool yarn. Activity Base Total Cost Type of Cost Sorting Hours of sorting $25,600 Cleaning Units of cleaning machine power 38,400 Combing Hours of combing machine use 1,200 Raw Wool Wool Yarn Hours of sorting required 800 3,200 Units of cleaning machine power required 1.920 4.480 Hours of combing machine use required 70 30 In the following table, compute and enter the activity rate for each of the three activities. If required, round your answers to the nearest cent. Activity Rate Activity Sorting $ per sorting hour Cleaning $ per unit of cleaning machine power Combing $ per hour of combing machine use In the following table, allocate the costs of sorting, cleaning, and combing based on the rates of activity consumed by each product's process. When required, round your answers to the nearest dollar. Raw Wool Wool Yarn Sorting cost $ $ Cleaning cost Combing cost Total cost $ Answer the following question. After reviewing your work on the Single Plantwide Rate and Activity-Based Costing panels, which of the costing method would you recommend to WoolCorp, and why? Since both the methods give the same costs for each product, there is no advantage to either method. Single plantwide factory overhead rate method, because it is a tried-and-true method used for the entire life of the company. The company should use whichever method is the cheapest to implement Activity-based costing, because it recognizes differences in how each product uses factory overhead activities, yielding more accurate product costs