Allocation of Overhead: Traditional and Activity-Based Costing MethodsRefer to P 8 in this

Allocation of Overhead: Traditional and Activity-Based Costing Methods

Refer to P 8 in this chapter. Assume that Oz Parson, the controller of Sea Scout, Inc., has received some additional information from the production manager, Parvin Hrinda. Hrinda reported that robotic equipment has been installed on the factory floor to increase productivity. As a result, direct labor hours per unit will decrease by 20 percent. Depreciation and other machine costs for the robots will increase total overhead from $220,000 to $320,000 for the year, which will increase the assembly activity cost pool from $80,000 to $180,000. The cost driver level for the assembly cost pool will change from 5,000 machine hours to 2,000 machine hours for the Rigger II and from 5,000 machine hours to 8,000 machine hours for the BioScout. The cost driver levels and cost pool amounts for setup, inspection, and engineering activities will remain the same.

1. Use the traditional method of applying overhead costs to

a. Calculate the overhead rate.

b. Compute the amount of the total overhead costs applied to each product line.

c. Calculate the product unit cost for each product line.

2. Use the activity-based costing method to

a. Calculate the overhead 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.

3. Complete the following table and discuss the differences in the costs assigned to the two product lines resulting from the additional information in this assignment.

Product unit cost

Rigger II

BioScout

Traditional  

Activity-based costing  

Difference: decrease (increase)  

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