Sea Scout, Inc., manufactures two types of underwater vehicles. Oil companies use the vehicle called Rigger II to examine offshore oil rigs, and marine biology research foundations use the BioScout to study coastlines. The company’s 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:

*$13.75 per Direct Labor Hour × 30 Direct Labor Hours per Unit = $412.50
†$13.75 per Direct Labor Hour × 40 Direct Labor Hours per Unit = $550
Parson believes that 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 BioScout’s 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 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:
Estimated
Activity Pool Overhead Cost
Setup ......... $70,000
Inspection ....... 20,000
Engineering ........ 50,000
Assembly ....... 80, 0000
Total ..........$220,000

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-basedcosting?

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Rigger IBioScout Product costs per unit Direct materials Direct labor Applied overhead Product unit cost $10,000.00 $12,000.00 450.00 600.00 412.50 550.00+ Units of production Direct labor hours $11,862.50 $14,150.00 100 4,000 400 2,000 Rigger II BioScout Total Cost Driver Driver Leve Driver Level Driver Level Number of setups Number of inspections Engineering hours Machine hours 250 150 600 5,000 450 350 1,400 5,000 700 500 2,000 10,000