Question

1. 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 A method that allocates factory overhead to products using a single factory overhead rate across all departments.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 A cost allocation method that identifies activities causing the incurrence of costs and allocates these costs to products (or other cost objects), based on activity drivers (bases).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	$	$

   Feedback

   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	A measure of activity that is related to changes in cost. Used in analyzing and classifying cost behavior. Activity bases are also used in the denominator in computing the predetermined factory overhead rate to assign overhead costs to cost objects.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	800	3,200
   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 The budgeted activity rate divided by total estimated activity-base usage.activity rate for each of the three The types of work, or actions, involved in a manufacturing or service process.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	$	$

Answer 1

1.Statement of allocation of factory overheads cost (predetermined overhead rate)

	Raw wool	Wool Yarn
Allocated Factory overheads cost	$ 52,240 [ 80 hours * $ 653 ]	$ 13,060 [ 20 hours * $ 653 ]

Working Note:

Particulars	Amount ($)
Sorting	25,600
Cleaning	38,400
Combing	1,300
Total Factory Overheads	65,300

	Raw Wool	Wool Yarn	Total
Hours of combing machine	80	20	100

Predetemined Overhead Rate = Total factory overheads / Total combing hours

= $ 65,300 / 100 hours

= $ 653

Activity based costing:

2.Statement showing Budgeted activity rate divided by total estimated activity base usage

ACTIVITY	ACTIVITY RATE ($)
Sorting	6.4 per hours of sorting
Cleaning	6 per units of cleaning machine power
Combing	13 per hour of combing machine u7se

Working Note:

Activity	Activity rate ($) A	allocation base	allocation base value B	Activity rate per allocation base ($) A/B
Sorting	25,600	Hours of sorting	4000 [800 + 3200]	6.4
Cleaning	38,400	Units of cleaning machine power	6400 [1920 + 4480]	6
Combing	1,300	Hours of combing machine use	100 [80 + 20]	13

3.Table showing allocation of sorting cleaning and combing based on the activity rates consumed( ABC costing method)

Particulars	Raw Wool	Wool Yarn
Sorting	5,120 [800 hours * $ 6.4]	20,480 [3200 hours * $ 6.4]
Cleaning	11,520 [1920 units * $ 6]	26,880 [4480 units * $ 6]
Combing	1040 [80 hours * $ 13]	260 [20 hours * $ 13]
Total Factory Overheads	17,680	47,620

Conclusion:

Therefore from the above two methods it is evident that the total facory ovead cost differ:-

	Raw Wool	Wool Yarn
Single plant wide rate method	52,240	13,060
ABC costing method	17,680	47,620