Reference no: EM132427939

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	$200	$100
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. GSE currently uses the number of units as the cost driver for the allocation of overhead cost. As a result, GSE allocated $90 ($324,000 ÷ 3,600 units) of overhead cost to each medal produced.

The president of the company, Jerry 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 50% of the overhead should be charged to the gold medals, 33.3% to silver, and only 16.7% of the overhead should be charged 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 Mr. Goldsmith'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.)