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 550 pounds of either raw wool or wool yarn:

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

	Raw Wool	Wool Yarn
Hours of combing machine use required	70	30

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:

	Raw Wool	Wool Yarn
Allocated factory overhead cost

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	$1,400

	Raw Wool	Wool Yarn
Hours of sorting required	800	3,200
Units of cleaning machine power required	1,800	4,200
Hours of combing machine use required	70	30

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.

Activity	Activity Rate
Sorting
Cleaning
Combing

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

Total ovrheads			65400
Divide: Total combng hrs			100
OH rate per Combing hr			654
OH allocated
		Raw Wool	Wool Yarn
Combing Hours		70	30
Multiply: OH rate		654	654
OH applied		45780	19620
STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL
			Activity	Total	Expected	Activity
ACTIVITY COST POOL			Measures	Overheads	Activity	Rate
Sorting			Sorting hrs	25600	4000	6.4
Cleaning			Cleaning units	38400	6000	6.4
Combing			Combing MH	1400	100	14
Overheads allocated
Activity	Rate	Raw Wool		Wool Yarn
		Activity	OH cost	Activity	OH cost
Sorting	6.4	800	5120	3200	20480
Cleaning	6.4	1800	11520	4200	26880
Combing	14	70	980	30	420
TOTAL OVERHEADS			17620		47780