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 550 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	70	30

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	1,920	4,480
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

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

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

Single Plantwide Factory Overhead Rate = (Total Budgeted Factory Overhead) ÷ (Total Budgeted Plantwide Allocation Base)
Total Budgeted Factory Overhead:
Factory Overhead Type			$
Sorting			$25,600
Cleaning			38,400
Combing			1200
Total			$65,200
Total Budgeted Plantwide Allocation Base=Total combing machine hours:
		Hours
Raw wool		70
Wool yarn		30
Total		100
Single Plantwide Factory Overhead Rate = 65200 ÷ 100=$ 652 per combing hour
Allocated factory overhead cost=Single Plantwide Factory Overhead Rate*Combing machine hour
Allocated factory overhead cost:
					Raw wool	Wool yarn
Single Plantwide Factory Overhead Rate				a	652	652
Combing machine hour				b	70	30
Allocated factory overhead cost				a*b	45640	19560
Activity rate=Total budgeted activity/Total activity driver
	Budgeted activity	Activity driver		Activity rate
	a	b				a/b
Sorting	$25,600	5000	Hours of sorting			$5.12	Per hour of sorting
		(1000+4000)
Cleaning	38,400	6400	Units of cleaning machine power			$6.00	Per Unit of cleaning machine power
		(1920+4480)
Combing	1200	100	Hours of combing machine use			$12.00	per hour of combing machine use
		(70+30)
	$65,200
Overhead allcated=Activity driver for the product*Activity rate
			Raw wool	Wool yarn
		Activity rate	Activity driver	Overhead allocated	Activity driver	Overhead allocated
		a	b	a*b	c	b*c
Sorting cost		$5.12	1000	$5,120	4000	$20,480
Cleaning cost		$6.00	1920	$11,520	4480	$26,880
Combing cost		$12.00	70	$840	30	$360		ekkarill92 Next > < Previous Related Solutions Mastery Problem: Activity-Based Costing WoolCorp WoolCorp buys sheep’s wool from farmers. The company began operations in... 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... Mastery Problem: Activity-Based Costing WoolCorp WoolCorp buys sheep’s wool from farmers. The company began operations in... Mastery Problem: Activity-Based Costing WoolCorp WoolCorp buys sheep’s wool from farmers. 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