1. 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	80	20

   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 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	1,000	4,000
   Units of cleaning machine power required	1,800	4,200
   Hours of combing machine use required	80	20

   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
   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 products process. When required, round your answers to the nearest dollar.

   	Raw Wool	Wool Yarn
   Sorting cost	$	$
   Cleaning cost
   Combing cost
   Total cost	$	$