# Financial and Managerial Accounting: P16-8 Sea Scout , Inc., manufactures two types

Financial and Managerial AccountingP16-8 Allocation of overhead: Traditional and activity based costing methods
Sea Scout , Inc., manufactures two types of underwater vehicles. Oil companies use the vehicle called Rigger II to examine offshore oil rigs, and marine bilogu research foundations use the bioscout to study coastlines. The company San Diego Factory is not fully automated and requires some direct labor.
Using estimated overhead costs of \$220,000 and an estimated 16,000 hours of direct labor, Oz parson, the company's controller, calculated a traditional overhead rate of \$13.75 per direct labor hour.
He used normal costing to calculate the product unit cost for both product lines as shown in the following summary:
Product costs per unit Rigger II BioScout
Direct Materials 10,000 12,000
Direct labor 1,450 1,600
Product unit cost \$11,863 \$14,150
Units of production 400 100
Direct labor hours 12,000 4,000
*\$13,75 per direct labor hour x 30 direct labor hours per unit = \$412.50
+\$13.75 per direct labour hour x 40 direct labor hours per unit = \$550

Parson believes the product unit cost for the BioScout is too low. After carefully observing the production process, he has concluded that the BioScout requires much more attention than the Rigger II. Because of the bioscouts more intricate design, it requires more production activities, and fewer subassemblies can be produced by suppliers. He has therefore created four overhead activity pools, estimated the overhead costs odf the activity pools,estimated the overhead costs of the activity pools, selected a cost driver for each pool, and estimated the cost driver levels for each product line, as shown in the following summary:
Setup 70,000
Inspection 20,000
Engineering 50,000
Assembly 80,000
Total 220,000

Cost driver Rigger II driver level Bioscout driver level Total driver level
Number of setups 250 450 700
Number of inspections 150 350 500
Engineering hours 600 1,400 2,000
Machine hours 5,000 5,000 10,000

Required
1. Use activity based costing to do the following
a. Calculate the activity cost rate for each activity pool
b. Compute the overhead costs applied to each product line by activity pool and in total.
c. Calculate the product unit cost for each product line
2. Manager insight: What differences in the costs assigned to the two product lines resulted from the shift to activity based costing?