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:

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

	Raw Wool	Wool Yarn
Hours of combing machine use required	80	20

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	1,300

	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	80	20

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	$	$

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

Requirement 1

Single Plantwide Overhead Rate = Total Estimated Manufacturing Overhead / Total Combing Hours

Total Combing Hours = 100 Hours

Total Estimated Manufacturing Overhead = $ 65,300

Single Plantwide Overhead Rate = 65,300 / 100

Single Plantwide Overhead Rate = $ 653 per Combing Hour

Particulars	Raw Wool	Wool Yarn
Single Plantwide Overhead Rate	653	653
* Combing Hours	80	20
Total Manufacturing Overheads Costs	52,240	13,060

Requirement 2

	A	B	C= A/B
Particulars	Estimated Cost	Activity Level	Activity Allocation Rate
Sorting	25,600	5,000	5.12	Per Sorting Hour
Cleaning	38,400	6,400	6	Per Unit of Cleaning Machine Powder
Combing	1,300	100	13	Per Combing Hour
Total	65,300

Raw Wool

​​​​

Particulars	Activity Level	Activity Allocation Rate	Total Estimated Overhead
Sorting	1,000	5.12	5,120
Cleaning	1,920	6	11,520
Combing	80	13	1,040
Total			17,680

Wool Yarn

Particulars	Activity Level	Activity Allocation Rate	Total Estimated Overhead
Sorting	4,000	5.12	20,480
Cleaning	4,480	6	26,880
Combing	20	13	260
Total			47,620

Total Overhead Cost = Activity Level * Activity Allocation Rate

Activity Based Costing is more recommended to WoolCorp Company.