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

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. 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 550 pounds of either raw wool or wool yarn:

Total Factory	Total Costs
Overhead Costs
Sorting	$25,600
Cleaning	39,600
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 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

	Raw Wool	Wool Yarn
Allocated factory overhead cost

Activity-Based Costing

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	Total Cost
Sorting	Hours of sorting	$25,600
Cleaning	Units of cleaning machine power	39,600
Combing	Hours of combing machine use	1,200

	Raw Wool	Wool Yarn
Hours of sorting required	1,500	3,500
Units of cleaning machine power required	1,800	4,200
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		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	$	$

Continue/Discontinue

For the past year, WoolCo has experimented with its third product, extra-thick rug yarn. The company wishes to consider whether to continue or discontinue manufacturing and selling this product. You decide to prepare a differential analysis of the income related to all three products. To begin your analysis, you review the following Condensed Income Statement. Then scroll down to complete the differential analysis.

WoolCo

Condensed Income Statement

For the Year Ended December 31

1		Raw Wool	Wool Yarn	Rug Yarn	Total Company
2	Sales	$210,000.00	$155,000.00	$187,000.00	$552,000.00
3	Cost of goods sold:
4	Variable costs	$48,000.00	$18,600.00	$37,170.00	$103,770.00
5	Fixed costs	32,000.00	12,400.00	24,800.00	69,200.00
6	Total cost of goods sold	$80,000.00	$31,000.00	$61,970.00	$172,970.00
7	Gross profit	$130,000.00	$124,000.00	$125,030.00	$379,030.00
8	Operating expenses:
9	Variable expenses	$5,000.00	$7,750.00	$53,120.00	$65,870.00
10	Fixed expenses	89,000.00	77,500.00	106,200.00	272,700.00
11	Total operating expenses	$94,000.00	$85,250.00	$159,320.00	$338,570.00
12	Income (loss) from operations	$36,000.00	$38,750.00	$(34,290.00)	$40,460.00

Complete the table using the data in the income statements previously shown to compare the effects of dropping the rug yarn line of products. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If an amount is zero, enter 0.

Differential Analysis

Continue Rug Yarn (Alternative 1) or Discontinue Rug Yarn (Alternative 2)

December 31

1		Continue Rug Yarn (Alternative 1)	Discontinue Rug Yarn (Alternative 2)	Differential Effect on Income (Alternative 2)
2	Revenues
3	Costs:
4	Variable
5	Fixed
6	Total Costs
7	Income (loss)

Final Questions

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?

Traditional costing, because it is a tried-and-true method used for the entire life of the company.

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

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

The company should use whichever method is the cheapest to implement.

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

The company is indifferent between Alternative 1 and Alternative 2

Discontinue (Alternative 2)

Continue (Alternative 1)

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.