Writing Assignment Selection of the appropriate cost driver
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 | Bronze |
Direct materials | $300 | $130 | $ 35 |
Labor | 1 20 | 120 | 120 |
During 2011, 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.
Required
The president of the company 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 cost to produce the medals. In other words, more overhead should be charged to expensive gold medals, less to silver, and even less to bronze. Assume that you are BEI’s chief financial officer. Write a memo responding to the president’s suggestion.
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