WoolCorp buys sheep’s wool from farmers. The company began operations in January
ID: 2567467 • 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 450 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, compute 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 following question.
After reviewing your work on the Single Plantwide Rate and Activity-Based Costing panels, which of the two costing methods would you recommend to WoolCorp, and why?
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.
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.
Factory Overhead Type Budgeted Factory Overhead Sorting $25,600 Cleaning $38,400 Combing $1,300Explanation / Answer
Req 1: Total overhead of plant = (25600+38400+1300) = $ 65,300 Total machine hours (70+30) = 100 hours Single plantwide overhed rate = Budgeted Overhead of plant / Budgeted machine hours (65,300 /100 ) = $ 653 per machine hour RAW WOOL WOOL YARN Machine hours 70 30 Overhead rate per MH 653 653 Overhead allocated 45710 19590 Req 2: Activity overhead rate: Sorting = Total sorting cost / Hours of sorting (25600 /5000) = $ 5.12 per hour Cleaning = Total cleaning cost / Machine power units (38400 /6000 ) = $ 6.40 per unit of machine power Combing = Total combing cost/ Machine hours used (1300 /100 ) = $ 13 per machine hour RAW WOOL WOOL YARN Hours of sorting 1000 4000 Units of cleaning Machine Power 1800 4200 Hours of combing machine 70 30 Overhead allocated: Sorting (@5.12 per sorting hr) 5120 20480 Cleaning (@6.40 per unit machine power) 11520 26880 Combing(@13 per machine hour of comb) 910 390 Total overhead 17550 47750 Req 3: Answer: We recommend the following: Activity Based costing, Because it recognizes the differences in how each product uses factory overhead activities, yielding more accurate product cost
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