Question

WoolCo 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 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. In order to understand their current system better, you evaluate WoolCo’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 500 pounds of either raw wool or wool yarn:

Total Factory	Total Costs
Overhead Costs
Sorting	$25,600
Cleaning	38,400
Combing	1,300

	Raw Wool	Wool Yarn
Hours of combing machine use required	80	20

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:

0 / 1

	Raw Wool	Wool Yarn
Allocated factory overhead cost		In order to compare WoolCo’s 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 $38,400 Combing Hours of combing machine use $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 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 Points: 3 / 3 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 $ $ 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 $200,000.00 $155,000.00 $167,000.00 $522,000.00 3 Cost of goods sold: 4 Variable costs $48,000.00 $18,600.00 $37,160.00 $103,760.00 5 Fixed costs 32,000.00 12,400.00 24,780.00 69,180.00 6 Total cost of goods sold $80,000.00 $31,000.00 $61,940.00 $172,940.00 7 Gross profit $120,000.00 $124,000.00 $105,060.00 $349,060.00 8 Operating expenses: 9 Variable expenses $5,000.00 $7,750.00 $53,130.00 $65,880.00 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 $159,330.00 $338,580.00 12 Income (loss) from operations $26,000.00 $38,750.00 $(54,270.00) $10,480.00 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”. Score: 24/58 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) 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: 0 / 1 Feedback Check My Work Review the data you’ve compiled, and think about which method would provide more accurate product costs. 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: 0 / 1 Feedback Check My Work Which alternative is the most financially advantageous for WoolCo? 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 Not Important Impact on regular prices Contribution margin per bottleneck hour Differential revenue is more than differential costs Supplier price is less than WoolCo’s variable cost per unit Sunk costs Robinson-Patman Act

Answer 1