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 550 pounds of either raw wool or wool yarn:

Factory Overhead Type	Budgeted Factory Overhead
Sorting	$25,600
Cleaning	$38,400
Combing	$1,200

	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

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	$1,200

	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	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	$	$

Final Question

Answer the question below.

After reviewing your work on the Traditional Costing and Activity-Based Costing panels, which of the two costing methods would you recommend to WoolCorp, and why?

Traditional costing, because it is a tried-and-true method used for the entire life of the company.

Since the methods both give the same costs for each product, there is no advantage to either method.

The company should use whichever method is the cheapest to implement.

Activity-based costing, because it recognizes differences in how each product uses factory overhead activities, yielding more accurate product costs.

Answer rating: 100% (QA)

Factory Overheads Amount Sorting 25600 Cleaning 38400 Combing 1200 Total 65200 1 Single Plant wideFa... View the full answer