Bullions Enterprises Inc. (BEI) makes gold, silver, and bronze medals used to recognize outstanding athletic performance in regional and national and national sporting events. The per-unit direct cost of producing the medals follow:

	Gold	Silver	Bronze
Direct Materials	$300	$130	$35
Labor	120	120	120

During 2015, BEI made 1,200 units of each type of medal for a total of 3,600 (1,200 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. 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 suggestions.

To help the president better understand your interpretation you'll need to establish a basis for your memo. Include the following responses within your memo.

1. Explain why the terms direct cost and indirect cost are independent of the terms fixed cost and variable cost. Give an example to illustrate.

2. In a manufacturing environment, which costs are direct and which are indirect in product costing?

3. What is the objective of allocating indirect manufacturing overhead costs to the product?