Mastery Problem: Activity-Based Costing

WoolCorp

WoolCorp buys sheeps 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. Youve just been hired as a production manager at WoolCorp.

Currently WoolCorp makes two products: (1) raw, clean wool to be used as stuffing or 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 WoolCorps current method of costing for raw wool and wool yarn. The production staff has compiled the following information for you on the production of 550 pounds of either raw wool or wool yarn:

Factory Overhead Type	Budgeted Factory Overhead
Sorting	$25,600
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: $fill in the blank f0603505f05cff4_1 per combing hour

	Raw Wool	Wool Yarn
Allocated factory overhead cost	$fill in the blank f0603505f05cff4_2	$fill in the blank f0603505f05cff4_3

Activity-Based Costing

In order to compare WoolCorps 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.

Type of Cost	Activity Base	Total 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	Activity Rate
Sorting	$fill in the blank f31120f4a05c079_1	per sorting hour
Cleaning	$fill in the blank f31120f4a05c079_2	per unit of cleaning machine power
Combing	$fill in the blank f31120f4a05c079_3	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 products process. When required, round your answers to the nearest dollar.

	Raw Wool	Wool Yarn
Sorting cost	$fill in the blank f31120f4a05c079_4	$fill in the blank f31120f4a05c079_5
Cleaning cost	fill in the blank f31120f4a05c079_6	fill in the blank f31120f4a05c079_7
Combing cost	fill in the blank f31120f4a05c079_8	fill in the blank f31120f4a05c079_9
Total cost	$fill in the blank f31120f4a05c079_10	$fill in the blank f31120f4a05c079_11

Final 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?

Check My Work