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 $300 $200 $100 materials Labor 120 120 During 2016 GSE made 1.200 units of each type of medal for a total of 3,600 2,200 x 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.) • As always, original post is due the Sunday before the post closes on Tuesday, • Answer in complete sentences Grammar and spelling count. • Reply constructively to two other students. (Be sure to address each student by name.) Chhh

Answer 1

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Answer 1

The purpose of overhead allocation is to distribut period costs to products. Period costs are those which are not identifiable to a particular product rather these are self sustaining costs incurred by the organization. These may be head office salaries, depreciation or amortization costs.

While choosing overhead allocation method nature of products and business should be considered. If products are identical then overhead should be allocated on the basis of units produced. If they are labor oriented then labor hours should be used.

If they are machine oriented then machine hours should be used.

Answer 2

Allocating overhead on the basis of direct materials is unacceptable as it does not make sense. Its given that the product goes through same production process and packaging and shipping conditions are also similar. So overhead should be allocated on the basis of units.

Answer 3

Other methods may be= percentage of direct labor cost. Because same amount of labor cost is used so overhead can be allocated on the basis of direct labor cost easily.

Activity based costing may be used. For this the overhead cost will be divided into activity cost pools then rate will be calculated on the basis of activity drivers. Then that ABC rate will be used to arrive at the allocated cost by multiplying with the activity drivers used by each product.