Gold and Silver Enterprises, Inc. (GSE), makes gold, silver, and bronze medals u

Question

Gold and Silver Enterprises, Inc. (GSE), makes gold, silver, and bronze medals used to recognize outstanding athletic performance in regional and national sporting events. The per-unit direct costs of producing the medals follow. Gold Silver Bronze Direct materials $300 $130 $35 Labor ?120 ?120 ?120 During 2016, GSE made 1,200 units of each type of medal for a total of 3,600 (1,200 × 3) medals. All medals are created through the same production process, and they are packaged and shipped in identical containers. Indirect overhead costs amounted to $324,000. BEI currently uses the number of units as the cost driver for the allocation of overhead cost. As a result, BEI allocated $90 ($324,000 ÷ 3,600 units) of overhead cost to each medal produced. The president of the company, Berry Goldsmith, has questioned the wisdom of assigning the same amount of overhead to each type of medal. He believes that overhead should be assigned on the basis of the direct material cost used to produce the medals so that the most overhead should be charged to the gold medals, less to silver, and even less to bronze. Required: 1. What is the purpose of overhead allocation? What things should be considered when choosing an overhead allocation method? (Cite all references; use your own words.) 2. Why is the president's idea for allocating overhead based on direct materials cost misguided (wrong)? Explain your answer using evidence from Chapter 12 or some other source. Be specific. Again, cite your references. 3. What other methods (2) of overhead allocation would you recommend to the president? Why? (Explain your answer. )

Explanation / Answer

Answer

1) The allocation of overhead can not be done on basis of the direct material used ,as the overhead cost has nothing to do with differences in the prices of different materials used.

2).Based on direct labor hours or based on activity base under ABC costing.

3) Overhead are normally proportional based on labor hours. based on direct labor hours or based on activity base under ABC costing.

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