Traditional costing allocates overhead costs to products based upon a predetermined factory overhead rate, which is computed using an estimated activity base such as direct labor hours or machine hours. The rate is computed as follows:

Predetermined Factory Overhead Rate = (Estimated Total Factory Overhead Costs) (Estimated Activity Base)

WoolCo has been using traditional costing with combing machine hours as the activity base. The company would like to consider activity-based costing. In order to understand their current system better, you evaluate WoolCos 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:

Total Factory	Total Costs
Overhead Costs
Sorting	$25,600
Cleaning	38,400
Combing	1,300

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

In the following table, use combing machine hours as the activity base for assigning overhead costs to each product. When required, round your answers to the nearest dollar.

Predetermined factory overhead rate: per direct labor hour

	Raw Wool	Wool Yarn
Allocated factory overhead cost

In order to compare WoolCos current traditional method with activity-based costing, you interview the production staff and compile the following information, which relates only to the costs for raw wool and wool yarn. WoolCo wishes to consider costing only for these two products at this time, since they are more established and have more data to evaluate.

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	1,800	4,200
Hours of combing machine use required	70	30

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

Points:

3 / 3

In the following table, allocate the costs of sorting, cleaning, and combing based on the rates of activity consumed by each products process. When required, round your answers to the nearest dollar.

	Raw Wool	Wool Yarn
Sorting cost	$	$
Cleaning cost
Combing cost
Total cost	$	$

For the past year, WoolCo has experimented with its third product, extra-thick rug yarn. The company wishes to consider whether to continue or discontinue manufacturing and selling this product. You decide to prepare a differential analysis of the income related to all three products. To begin your analysis, you review the following Condensed Income Statement. Then scroll down to complete the differential analysis.

WoolCo

Condensed Income Statement

For the Year Ended December 31

1		Raw Wool	Wool Yarn	Rug Yarn	Total Company
2	Sales	$210,000.00	$155,000.00	$187,000.00	$552,000.00
3	Cost of goods sold:
4	Variable costs	$48,000.00	$18,600.00	$37,170.00	$103,770.00
5	Fixed costs	32,000.00	12,400.00	24,800.00	69,200.00
6	Total cost of goods sold	$80,000.00	$31,000.00	$61,970.00	$172,970.00
7	Gross profit	$130,000.00	$124,000.00	$125,030.00	$379,030.00
8	Operating expenses:
9	Variable expenses	$5,000.00	$7,750.00	$53,120.00	$65,870.00
10	Fixed expenses	89,000.00	77,500.00	106,200.00	272,700.00
11	Total operating expenses	$94,000.00	$85,250.00	$159,320.00	$338,570.00
12	Income (loss) from operations	$36,000.00	$38,750.00	$(34,290.00)	$40,460.00

Complete the table using the data in the income statements previously shown to compare the effects of dropping the rug yarn line of products. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If an amount is zero, enter 0.

Question not attempted.

Score: 0/58

Differential Analysis

Continue Rug Yarn (Alternative 1) or Discontinue Rug Yarn (Alternative 2)

December 31

1		Continue Rug Yarn (Alternative 1)	Discontinue Rug Yarn (Alternative 2)	Differential Effect on Income (Alternative 2)
2	Revenues
3	Costs:
4	Variable
5	Fixed
6	Total Costs
7	Income (loss)