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 500 pounds of either raw wool or wool yarn:

Factory Overhead Type	Budgeted Factory Overhead
Sorting	$25,600
Cleaning	38,400
Combing	1,400

	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.

Mastery Problem: Activity-Based Costing 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 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 WoolCorp's current method of costing for raw wool and wool yam. The production staff has compiled the following information for you on the production of 500 pounds of either raw wool or wool yarn: : Budgeted Factory Factory Overhead Overhead Type Sorting $25,600 Cleaning 38,400 Combing 1,400 Raw Wool Wool Yarn Hours of combing machine 70 30 use required 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 Activity-Based Costing 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. . Type of Cost Activity Base Total Cost Sorting Hours of sorting $25,600 Units of cleaning machine power 38,400 Combing Hours of combing machine use 1,400 Cleaning Raw Wool Yarn Wool 3,200 Hours of sorting required 800 Units of cleaning machine power required 1,920 Hours of combing machine use required 70 4,480 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 $ per sorting hour per unit of cleaning machine power Cleaning s 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 $ $ 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