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 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 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 500 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 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 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 product’s process. When required, round your answers to the nearest dollar.

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

Final Question

Answer the following question.

After reviewing your work on the Single Plantwide Rate and Activity-Based Costing panels, which of the costing method would you recommend to WoolCorp, and why?

Single plantwide factory overhead rate method, 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.

Answer 1

Wool Corp

1. Single plantwide factory overhead rate:

Plantwide factory overhead rate = total budgeted factory overhead/total budgeted plantwide allocation base

Plantwide allocation base = combing machine hours

Total combing machine hours = 80 + 20 = 100

Total budgeted factory overhead = $65,200

Plantwide factory overhead rate = 65,200/100 = $65.20

Allocated factory overhead cost = = plantwide factory overhead rate x number of combing hours used

• Raw Wool

Allocated factory overhead cost = $65.20 x 80 hours = $52,160

• Wool Yarn

Allocated factory overhead cost = $65.20 x 20 hours = $13,040

1. ABC costing method factory overhead rate –

Activity	Activity Cost	Activity Usage	Activity Rate
Sorting	$25,600	5,000 hours of sorting	$5.12	per sorting hour
Cleaning	$38,400	6,000 units of power	$6.40	per unit of power
Combing	$1,200	100 hours	$12	per combing hour

Allocation of costs of sorting, cleaning and combing based on the activity rates computed above.

	Raw Wool	Wool Yarn
Sorting	$5,120	$20,480
Cleaning	$11,520	$26,880
Combing	$240	$960

Raw Wool
Activity	Activity Rate	Activity Usage	Allocated Activity Cost
Sorting	$5.12	1,000 hours of sorting	$5,120
Cleaning	$6.40	1,800 units of power	$11,520
Combing	$12	80 hours of combing	$960
Total allocated factory overhead			$17,600

Wool Yarn
Activity	Activity Rate	Activity Usage	Allocated Activity Cost
Sorting	$5.12	4,000 hours of sorting	$20,480
Cleaning	$6.40	4,200 units of power	$26,880
Combing	$12	20 hours of combing	$240
Total allocated factory overhead			$47,600

1. After reviewing the two methods for allocation of factory overhead,

The recommendation is ‘Activity Based Costing’ because it recognizes differences in how each product uses factory overhead activities, yielding more accurate results.