Bullions Enterprises, Inc. (BEI), makes gold, silver, and bronze medals used to

Question

Bullions Enterprises, Inc. (BEI), 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    Bronz

Direct materials

$300

$130

$35

Labor

120

120

120

During 2012, BEI 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, J.P. Money, 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.

1.   Why is the president's idea for allocating overhead based on direct materials cost misguided? Explain your answer using evidence from Chapter 12 or some other source. Be sure to cite your source(s).

2. What other methods (2) of overhead allocation would probably be better than the one proposed by the president? Explain your answer.

3. Assume that you are BEI's chief financial officer. Write a memo responding to the president's suggestion. In your memo, politely explain 1) why his allocation method is probably not the best one and 2) explain what method would be more appropriate. (You can choose the current method (number of units per medal type) if you wish.) Be sure your memo is the form of a memo, not a letter.

Direct materials

$300

$130

$35

Labor

120

120

120

Explanation / 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.

Here the cost activity measure can be used is the any equipment specially used for making of any of the above products , if so what is no of hours used for each

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