WoolCorp buys sheep’s wool from farmers. The company began operations in January

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.

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:

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.

Points:

Factory Overhead Type Budgeted Factory Overhead Sorting $25,600 Cleaning $38,400 Combing $1,300

Explanation / Answer

Calculate total activity required (Sum of Raw Wool and Wool Yarn) for each type of costing (Sorting, Cleaning, Combing)

Calculate activity rate: Activity Rate = Total cost / Total activity required.

For example activity rate for Sorting = 25600/5000 = 5.12

Allocate costs of sorting, cleaning and bombing based on rates of activity as determined above consumed by each product. Multiply activity required by activity rate. For example cost allocated to Raw Wool for sorting activity = 1000*5.12 = 5120

Raw Wool Wool Yarn Total Hours of sorting required 1,000 4,000 5,000 Units of cleaning machine power required 1,800 4,200 6,000 Hours of combing machine use required 70 30 100

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