Question

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 RateWoolCorp 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 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 OverheadSorting $25,600Cleaning $38,400Combing $1,200Raw Wool Wool YarnHours of combing machine use required 70 30In 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:Raw Wool Wool YarnAllocated factory overhead cost Activity-Based CostingIn 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 CostSorting Hours of sorting $25,600Cleaning Units of cleaning machine power $38,400Combing Hours of combing machine use $1,200Raw Wool Wool YarnHours of sorting required 800 3,200Units of cleaning machine power required 1,920 4,480Hours of combing machine use required 70 30In the following table, calculate and enter the activity rate for each of the three activities. If required, round your answers to the nearest cent.Activity Activity RateSorting Cleaning Combing 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 YarnSorting cost $ $Cleaning cost Combing cost Total cost $ $Final QuestionAnswer the question below.After reviewing your work on the Traditional Costing and Activity-Based Costing panels, which of the two costing methods would you recommend to WoolCorp, and why?Traditional costing, because it is a tried-and-true method used for the entire life of the company.Since the methods both 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.Activity-based costing, because it recognizes differences in how each product uses factory overhead activities, yielding more accurate product costs.

Answer 1

Answer:

WoolCorp

1. Single Plantwide Factory Overhead Rate: $652

2. Comparison of WoolCorp’s current method with activity-based costing:

                                        Raw Wool       Wool Yarn

Allocated factory

overhead cost             $45,640              $19,560

Activity-Based Costing $17,840              $47,640

3. Calculation of and entering the activity rate for each of the three activities:

Activity            Activity Rate

Sorting              $6.40 ($25,600/4,000)

Cleaning           $6.00  ($38,400/6,400)

Combing          $12.00 $1,200/100)

4. Allocation of the costs of sorting, cleaning, and combing to product:

                       Raw Wool         Wool Yarn

Sorting cost       $5,120                $20,400

Cleaning cost     11,520                  26,880

Combing cost        840                       360

Total cost        $17,840                $47,640

5. Recommended method of costing:

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

Explanation:

Key Decisions: product offerings, pricing, and vendors

Problem: method of assigning overhead to products

Products:

(1) raw, clean wool to be used as stuffing or insulation and

(2) wool yarn for use in the textile industry

Requirement: evaluate its costing methods for its raw wool and wool yarn.

Traditional Costing Method : Predetermined overhead rate computed as follows:

Single Plantwide Factory Overhead Rate= (Total Budgeted Factory Overhead) ÷ (Total Budgeted Plantwide Allocation Base) combing machine hours

Data for 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

Total overhead                     $65,200

                                     Raw Wool   Wool Yarn

Hours of combing

machine use required        70             30

Compiled Information:

Type of Cost     Activity Base          Total Cost    Rate

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  Total

Hours of sorting required    800              3,200        4,000

Units of cleaning machine

power required                 1,920               4,480       6,400

Hours of combing

machine use required          70                    30           100