ACCT 510: Chapter 7 Homework Problems

Cost Allocations Theory

Problem 7 – 6 Wasley

A)
Wasley, Inc. Product Product Product Product
A B C D Total

Net Sales 1250 850 1250 1650 5000

Direct Labor 450 600 540 640 2230

Direct Materials 250 0 125 160 535
Corporate Overhead (.80) 360 480 432 512 1784

Total Expenses 1060 1080 1097 1312 4549

Net Profit 190 -230 153 338 451

B)
Wasley, Inc. Product Product Product
A C D Total

Net Sales 1250 1250 1650 4150

Direct Labor 450 540 640 1630

Direct Materials 250 125 160 535
Corporate Overhead (.80) 840 432 512 1784

Total Expenses 1540 1097 1312 3949

Net Profit -290 153 338 201

C) Shirley Chen the manager is better off this way because the total operating income is
reduced by $250. thus decreasing Shirley Chen’s 10% bonus.

D) The corporation is not better off this way because the corporate overhead 80%
allocation spread remains the same; therefore eliminating Product B is taxing on Product
A.

E) The compensation system should be reevaluated and structured based on actual

performance related to savings related to total expenses opposed to net profit.

Problem 7-11 Encryption, Inc

Robert Morris University Illinois 1

A)
Federal International
Encryption, Inc. Systems Systems

Sales 1000 1500

Variable Costs 500 750

Engineering Design 240 360

Total Operating
Expenses 740 2610

Net Income 260 -1110

B) Zero-Based Budgeting is the method of budgeting that Engineering Design should

utilize. The author favors this method because it forces the discussion of what “value” the
Engineering Design” will bring to the product and how will the product bolster industry
opportunities.

Robert Morris University Illinois 2