Question

Mastery Problem: Activity-Based Costing

WoolCorp

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 450 pounds of either raw wool or wool yarn:

Factory
Overhead TypeBudgeted
Factory
Overhead

Sorting$25,600   

Cleaning38,400   

Combing1,200   

Raw WoolWool Yarn

Hours of combing machine use required8020

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 WoolWool 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 CostActivity BaseTotal Cost

SortingHours of sorting$25,600

CleaningUnits of cleaning machine power38,400

CombingHours of combing machine use1,200

Raw WoolWool Yarn

Hours of sorting required800    3,200    

Units of cleaning machine power required1,800    4,200    

Hours of combing machine use required80    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.

ActivityActivity 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 WoolWool Yarn

Sorting cost$$

Cleaning cost

Combing cost

Total cost$$

Final 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?

Answer 1

Working notes