CMA Study Group

Cost allocated

  • 1.  Cost allocated

    Posted 17 days ago

    Please, I would like to have a better explanation about the question below.;

    ABD Realty manages five apartment complexes in a three-state area. Summary income statements for each apartment complex are shown as follows.  Included in the expenses is $1,200,000 of corporate overhead allocated to the apartment complexes based on rental income. The apartment complex(es) that ABD should consider selling is (are)
    A. Apartment complex Four.
    B. Apartment complexes Two, Three, Four, and Five.
    C. Apartment complexes Three, Four, and Five.
    D. Apartment complexes Four and Five

    Thank you for your help!

    Rosa Edjang Ayetebe
    Equatorial Guinea

  • 2.  RE: Cost allocated

    Posted 16 days ago

    I believe the answer is D. Apartment complexes Four and Five


    Remove the impact of allocated overhead (1.2M) from all the apartments and the ones which are still unprofitable at that point should be the ones dropped. below is the calculation.

    Do feel free to revert for any further clarity.

      One  Two  Three  Four  Five Total
    Rental Income 1000 1210 2347 1878 1065 7500
    expenses 800 1300 2600 2400 1300 8400
    Profit 200 -90 -253 -522 -235 -900
    % of Allocated Corporate overhead 13% 16% 31% 25% 14% 100%
    Allocated Corporate overhead 160 194 376 300 170 1200
              640.0     1,106.4     2,224.5     2,099.5     1,129.6
    Profit          360.0         103.6         122.5      (221.5)         (64.6)

    Abdul Naser Parkar
    Al Nasr, Al Sadd Doha

  • 3.  RE: Cost allocated

    Posted 16 days ago




    Thank you! I would like to know hoe we got the Allocated overhead for each Complex. For example the 160.




  • 4.  RE: Cost allocated

    Posted 16 days ago
      |   view attached

    First find proportion of each complex's rental income on total Income.. Example Complex one (1000/7500 equals 13%) and so on for each complex.

    Now use the total allocated overhead of 1.2M and find the amount already allocated to each complex, which is based on the percentage you calculated in step 1. (so 1.2M*13% is approx 160).

    Trust that clarifies.. Attaching the excel sheet which has the calculation for more clarity.

    Do not hesitate to get back if you still find it confusing.

    Abdul Naser Parkar
    Al Nasr, Al Sadd Doha


    solution.xlsx   11 KB 1 version