WoolCo 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 WoolCo.

Currently WoolCo makes three products: (1) raw, clean wool to be used as stuffing or insulation; (2) wool yarn for use in the textile industry, and (3) extra-thick yarn for use in rugs.

The company would like you to evaluate its costing methods for its raw wool and wool yarn. Upper management would also like your recommendations regarding a production decision regarding their current and proposed product lines.

Traditional costing allocates overhead costs to products based upon a predetermined factory overhead rate, which is computed using an estimated activity base such as direct labor hours or machine hours. The rate is computed as follows:

Predetermined Factory Overhead Rate = (Estimated Total Factory Overhead Costs) (Estimated Activity Base)

WoolCo has been using traditional costing with combing machine hours as the activity base. The company would like to consider activity-based costing

A cost allocation method that identifies activities causing the incurrence of costs and allocates these costs to products (or other cost objects), based on activity drivers (bases).

. In order to understand their current system better, you evaluate WoolCos 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:

Total Factory	Total Costs
Overhead Costs
Sorting	$25,600
Cleaning	38,400
You are in Column Total Factory Overhead CostsCombing	You are in Column Total Costs1,300

	Raw Wool	Wool Yarn
Hours of combing machine use required	You are in Column Raw Wool80	You are in Column Wool Yarn20

In the following table, use combing machine hours as the activity base for assigning overhead costs to each product. When required, round your answers to the nearest dollar.

Predetermined factory overhead rate: per direct labor hour

Points:

Raw Wool

Wool Yarn

Allocated factory overhead cost

You are in Column Raw Wool

In order to compare WoolCos current traditional method with activity-based costing, you interview the production staff and compile the following information, which relates only to the costs for raw wool and wool yarn. WoolCo wishes to consider costing only for these two products at this time, since they are more established and have more data to evaluate.

Type of Cost	Activity Base A measure of activity that is related to changes in cost. Used in analyzing and classifying cost behavior. Activity bases are also used in the denominator in calculating the predetermined factory overhead rate to assign overhead costs to cost objects.	Total Cost
Sorting	Hours of sorting	$25,600
Cleaning	Units of cleaning machine power	$38,400
You are in Column Type of CostCombing	Hours of combing machine use	You are in Column Total Cost$1,300

	Raw Wool	Wool Yarn
Hours of sorting required	1,200	2,800
Units of cleaning machine power required	1,800	4,200
Hours of combing machine use required	You are in Column Raw Wool80	You are in Column Wool Yarn20

In the following table, compute and enter the activity rate

The estimated activity cost divided by estimated activity-base usage.

for each of the three activities

The types of work, or actions, involved in a manufacturing process or service activity.

. If required, round your answers to the nearest cent.

Activity	Activity Rate
Sorting		per sorting hour
Cleaning		per unit of cleaning machine power
You are in Column ActivityCombing	You are in Column Activity Rate	per hour of combing machine use

Points:

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.

Answer the following questions (1) and (2), then fill in table (3).

1. After reviewing your work on the Traditional Costing and Activity-Based Costing panels, which costing method would you recommend to WoolCo, and why?

Activity-based costing, because it recognizes differences in how each product uses factory overhead activities, yielding more accurate product costs.

Traditional costing, 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.

Since both the methods give the same costs for each product, there is no advantage to either method.

Points:

Feedback

Check My Work

Explanation

2. After reviewing your work on the Continue/Discontinue panel, should WoolCo continue (Alternative 1) or discontinue (Alternative 2) the rug yarn product line?

Discontinue (Alternative 2)

Continue (Alternative 1)

The company is indifferent between Alternative 1 and Alternative 2

Points:

Feedback

Check My Work

Explanation

3. The following table shows several business decisions that might need to be made across the top row. Along the left-hand column, there are important factors to consider.

Choose the factor(s) that are important to the decision. Check all that apply. If the factor is not important to any of the decisions, check the Not Important box.

	Lease or Sell	Sell or Process Further	Special Price Order	Make or Buy	Continue or Discontinue	Production Bottleneck A condition that occurs when product demand exceeds production capacity.	Not Important
Impact on regular prices
Contribution margin per bottleneck hour
Differential revenue The amount of increase or decrease in revenue expected from a particular course of action as compared with an alternative. is more than differential costs The amount of increase or decrease in cost expected from a particular course of action compared with an alternative.
Supplier price is less than WoolCos variable cost per unit
Sunk costs A cost that is not affected by subsequent decisions.
Robinson-Patman Act