WoolCorp buys sheep’s wool from farmers. The company began operations in January
ID: 2488037 • Letter: W
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 550 pounds of either raw wool or wool yarn:
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:
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.
In the following table, calculate and enter the activity rate for each of the three activities. If required, round your answers to the nearest cent.
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.
Final Question
Answer the question below.
After reviewing your work on the Traditional Costing and Activity-Based Costing panels, which of the two costing methods would you recommend to WoolCorp, and why?
Traditional costing, because it is a tried-and-true method used for the entire life of the company.
Since the methods both 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.
Activity-based costing, because it recognizes differences in how each product uses factory overhead activities, yielding more accurate product costs.
Factory Overhead Type Budgeted Factory Overhead Sorting $25,600 Cleaning $38,400 Combing $1,200Explanation / Answer
Factory Overheads Amount Sorting 25600 Cleaning 38400 Combing 1200 Total 65200 1) Single Plant wideFactory overhead rate Raw Wool Wool Yarn Total Hours of combing machine use required 70 30 100 Overheads absorbed per hour , = Total Overheads / Total Number of hours = 65200 / 100 = 652 per hour Allocation of Overheads 45640 19560 65200 On basis of time used (652 x 70) (652 x 30) 2) Activity based costing Under Activity Based costing, overheads are recovered on basis of separate cost drivers associated with each department. Activity Driver Raw wool Wool Yarn Total Hours of Sorting required 800 3200 4000 Units of cleaning machine power required 1920 4480 6400 hours of combing machine use required 70 30 100 Activity Rate = Overhead cost / Total of Activity driver Factory Overheads Overhead Total of Activity Rate Amount Activity driver Sorting 25600 4000 hours 6.40 Cleaning 38400 6400 units 6.00 Combing 1200 100 hours 12.00 Allocation of cost on basis of activity drivers and activity rate Factory Overheads Activity Rate Raw wool Wool Yarn Total Sorting 6.40 5120 20480 25600 (800 x 6.40) (3200 x 6.40) Cleaning 6.00 11520 26880 38400 (1920 x 6) (4480 x 6) Combing 12.00 840 360 1200 (70 x 12) (30 x 12) Total Cost 17480 47720 65200
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