Mastery Problem: Activity-Based Costing
WoolCorp
WoolCorp buys sheep’s wool from farmers. The company beganoperations in January of this year, and is making decisions onproduct offerings, pricing, and vendors. The company is alsoexamining its method of assigning overhead to products. You’ve justbeen hired as a production manager at WoolCorp.
Currently WoolCorp makes two products: (1) raw, clean wool to beused as stuffing or insulation and (2) wool yarn for use in thetextile industry.
The company would like you to evaluate its costing methods forits raw wool and wool yarn.
Single Plantwide Rate
WoolCorp is currently using the single plantwide factoryoverhead rate method, which uses a predetermined overhead ratebased on an estimated allocation base such as direct labor hours ormachine hours. The rate is computed as follows:
Single Plantwide Factory Overhead Rate = (Total Budgeted FactoryOverhead) ÷ (Total Budgeted Plantwide Allocation Base)
WoolCorp has been using combing machine hours as its allocationbase.
The company would like to consider activity-based costing. Inorder to understand their current system better, you evaluateWoolCorp’s current method of costing for raw wool and wool yarn.The production staff has compiled the following information for youon the production of 550 pounds of either raw wool or woolyarn:
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 | 70 | 30 |
In the following table, use combing machine hours as theallocation base for assigning overhead costs to each product.When required, round your answers to the nearestdollar.
Single Plantwide Factory Overhead Rate: $ per combing hour
| Raw Wool | Wool Yarn |
| Allocated factory overhead cost | $ | $ |
Feedback
Review the single plantwide factory overhead rate method, andallocate the costs using a single plantwide factory overhead rateand the combing hours used by each product.
Activity-Based Costing
In order to compare WoolCorp’s current method withactivity-based costing, you interview the production staff andcompile the following information, which relates to the costs forraw 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 | 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, compute and enter the activity rate foreach of the three activities. If required, round youranswers 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 eachproduct’s process. When required, round your answers to thenearest dollar.
| Raw Wool | Wool Yarn |
| Sorting cost | $ | $ |
| Cleaning cost | | |
| Combing cost | | |
| Total cost | $ | $ |
