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 450 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	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

Points:

1 / 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	1,000	4,000
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

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	$	$

or 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”.

Question not attempted.

Score: 0/58

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 1

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 450 pounds of either raw wool or wool yarn:
Total Factory	Total Costs
Overhead Costs
Sorting	$                25,600.00
Cleaning	$                38,400.00
Combing	$                  1,300.00
Total Factory cost	$                65,300.00
	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
Predetermined Factory Overhead Rate = $65,300/100 hours	$                     653.00
	Raw Wool	Wool Yarn
Allocated factory overhead cost	$                45,710.00	$                 19,590.00
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	1,000	4,000
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	$5.12	per sorting hour
Cleaning	$6.40	per unit of cleaning machine power
Combing	$13.00	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	$5,120.00	$20,480.00
Cleaning cost	$11,520.00	$26,880.00
Combing cost	$910.00	$390.00
Total cost	$17,550.00	$47,750.00

Differential Analysis
31-Dec
	Continue Rug Yarn (Alternative 1)	Discontinue Rug Yarn (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$                             -	$               187,000.00	$            (187,000.00)
Costs:
Variable	$                             -	$                 90,290.00	$              (90,290.00)
Fixed	$131,000.00	$               131,000.00	$                             -
Total Costs	$              131,000.00	$               221,290.00	$              (90,290.00)
Income (loss)	$             (131,000.00)	$                (34,290.00)	$              (96,710.00)

7 Total Factory Total Costs 8 Overhead Costs 9 Sorting 25600 10 Cleaning 38400 11 Combing 1300 12 Total Factory cost =SUM(B9:B11) Raw Wool 14 Hours of combing machine use required 70 15 In the following table, use combing machine hours as the a 16 Predetermined factory overhead rate: per direct labor hour 13 Wool Yarn Total =B14+C14 30 Predetermined Factory Overhead Rate = $65,300/100 17 hours =B12/D14 Raw Wool =B17 B14 Wool Yarn =C14*B17 19 Allocated factory overhead cost 20 21 In order to compare WoolCo's current traditional method w 22 Type of Cost 23 Sorting 24 Cleaning 25 Combing Activity Base Hours of sorting Units of cleaning machine power Hours of combing machine use Total Cost 25600 38400 1300 Wool Yarn 4000 4200 27 Raw Wool 28 Hours of sorting required 1000 29 Units of cleaning machine power required 1800 30 Hours of combing machine use required 70 31 32 In the following table, compute and enter the activity rate f 33 Activity Activity Rate 34 Sorting =C23/(B28+028) 35 Cleaning =C24/(B29+C29) 36 Combing =C25/(B30+C30) 37 38 In the following table, allocate the costs of sorting, cleaning Raw Wool 40 Sorting cost =B28B34 41 Cleaning cost =B29 B35 42 Combing cost =B30*B36 43 Total cost =SUM(B40:342) per sorting hour per unit of cleaning machine power per hour of combing machine use Wool Yarn =C28*B34 =C29*B35 =C30*B36 =SUM(C40:042)