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WoolCo 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 WoolCo.

Currently WoolCo makes three products: (1) raw, clean wool to beused as stuffing or insulation; (2) wool yarn for use in thetextile industry, and (3) extra-thick yarn for use in rugs.

The company would like you to evaluate its costing methods forits raw wool and wool yarn. Upper management would also like yourrecommendations regarding a production decision regarding theircurrent and proposed product lines.

Traditional costing allocates overhead costs to products basedupon a predetermined factory overhead rate, which is computed usingan estimated activity base such as direct labor hours or machinehours. The rate is computed as follows:

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

WoolCo has been using traditional costing with combing machinehours as the activity base. The company would like to consideractivity-based costing

A cost allocation method that identifies activities causing theincurrence of costs and allocates these costs to products (or othercost objects), based on activity drivers (bases).

. In order to understand their current system better, youevaluate WoolCo’s current method of costing for raw wool and woolyarn. The production staff has compiled the following informationfor you on the production of 500 pounds of either raw wool or woolyarn:

Total Factory	Total Costs
Overhead Costs
Sorting	$25,600
Cleaning	38,400
You are in Column Total Factory Overhead CostsCombing	You are in Column Total Costs1,300

	Raw Wool	Wool Yarn
Hours of combing machine use required	You are in Column Raw Wool80	You are in Column Wool Yarn20

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

Predetermined factory overhead rate: per direct labor hour

Points:

	Raw Wool	Wool Yarn
Allocated factory overhead cost	You are in Column Raw Wool	In order to compare WoolCo’s current traditional method withactivity-based costing, you interview the production staff andcompile the following information, which relates only to the costsfor raw wool and wool yarn. WoolCo wishes to consider costing onlyfor these two products at this time, since they are moreestablished and have more data to evaluate. Type of Cost Activity Base A measure of activity that is related to changes in cost. Usedin analyzing and classifying cost behavior. Activity bases are alsoused in the denominator in calculating the predetermined factoryoverhead rate to assign overhead costs to cost objects. Total Cost Sorting Hours of sorting $25,600 Cleaning Units of cleaning machine power $38,400 You are in Column Type of CostCombing Hours of combing machine use You are in Column Total Cost$1,300 Raw Wool Wool Yarn Hours of sorting required 1,200 2,800 Units of cleaning machine power required 1,800 4,200 Hours of combing machine use required You are in Column Raw Wool80 You are in Column Wool Yarn20 In the following table, compute and enter the activity rate The estimated activity cost divided by estimated activity-baseusage. for each of the three activities The types of work, or actions, involved in a manufacturingprocess or service activity. . If required, round your answers to the nearest cent. Activity Activity Rate Sorting per sorting hour Cleaning per unit of cleaning machine power You are in Column ActivityCombing You are in Column Activity Rate per hour of combing machine use Points: 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 the nearestdollar. Answer the following questions (1) and (2), then fill in table(3). 1. After reviewing your work on the Traditional Costing andActivity-Based Costing panels, which costing method would yourecommend to WoolCo, and why? Activity-based costing, because it recognizes differences in howeach product uses factory overhead activities, yielding moreaccurate product costs. Traditional costing, because it is a tried-and-true method usedfor the entire life of the company. The company should use whichever method is the cheapest toimplement. Since both the methods give the same costs for each product,there is no advantage to either method. Points: Feedback Check My Work Explanation 2. After reviewing your work on the Continue/Discontinue panel,should WoolCo continue (Alternative 1) or discontinue (Alternative2) the rug yarn product line? Discontinue (Alternative 2) Continue (Alternative 1) The company is indifferent between Alternative 1 and Alternative2 Points: Feedback Check My Work Explanation 3. The following table shows several business decisions thatmight need to be made across the top row. Along the left-handcolumn, there are important factors to consider. Choose the factor(s) that are important to the decision. Checkall that apply. If the factor is not important to any of thedecisions, check the “Not Important” box. Lease or Sell Sell or Process Further Special Price Order Make or Buy Continue or Discontinue Production Bottleneck A condition that occurs when product demand exceeds productioncapacity. Not Important Impact on regular prices Contribution margin per bottleneck hour Differential revenue The amount of increase or decrease in revenue expected from aparticular course of action as compared with an alternative. is more than differential costs The amount of increase or decrease in cost expected from aparticular course of action compared with an alternative. Supplier price is less than WoolCo’s variable costper unit Sunk costs A cost that is not affected by subsequent decisions. Robinson-Patman Act