Harmon’s has several departments that occupy all floors of a two-story building that includes a basement floor. Harmon rented this building under a long-term lease negotiated when rental rates were low. The departmental accounting system has a single account, Building Occupancy Cost, in its ledger. The types and amounts of occupancy costs recorded in this account for the current period follow. Building rent . $400,000 Lighting expense . 25,000 Cleaning expense 40,000 Total occupancy cost . $465,000 The building has 7,500 square feet on each of the upper two floors but only 5,000 square feet in the basement. In prior periods, the accounting manager merely divided the $465,000 occupancy cost by 20,000 square feet to find an average cost of $23.25 per square foot and then charged each department a building occupancy cost equal to this rate times the number of square feet that it occupies. Jordan Style manages a department that occupies 2,000 square feet of basement floor space. In discussing the departmental reports with other managers, she questions whether using the same rate per square foot for all departments makes sense because different floor space has different values. Style checked a recent real estate report of average local rental costs for similar space that shows first-floor space worth $40 per square foot, second-floor space worth $20 per square foot, and basement space worth $10 per square foot (excluding costs for lighting and cleaning). Required 1. Allocate occupancy costs to Style’s department using the current allocation method. 2. Allocate the building rent cost to Style’s department in proportion to the relative market value of the floor space. Allocate to Style’s department the lighting and cleaning costs in proportion to the square feet occupied (ignoring floor space market values). Then, compute the total occupancy cost allocated to Style’s department. 3. Which allocation method (1 or 2) produces the lowest allocated occupancy cost for a manager of a basement department?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question

Harmon’s has several departments that occupy all floors of a two-story building that includes a basement
floor. Harmon rented this building under a long-term lease negotiated when rental rates were low. The
departmental accounting system has a single account, Building Occupancy Cost, in its ledger. The types
and amounts of occupancy costs recorded in this account for the current period follow. Building rent . $400,000
Lighting expense . 25,000
Cleaning expense 40,000
Total occupancy cost . $465,000
The building has 7,500 square feet on each of the upper two floors but only 5,000 square feet in the basement.
In prior periods, the accounting manager merely divided the $465,000 occupancy cost by 20,000
square feet to find an average cost of $23.25 per square foot and then charged each department a building
occupancy cost equal to this rate times the number of square feet that it occupies.
Jordan Style manages a department that occupies 2,000 square feet of basement floor space. In discussing
the departmental reports with other managers, she questions whether using the same rate per
square foot for all departments makes sense because different floor space has different values. Style
checked a recent real estate report of average local rental costs for similar space that shows first-floor
space worth $40 per square foot, second-floor space worth $20 per square foot, and basement space worth
$10 per square foot (excluding costs for lighting and cleaning). Required
1. Allocate occupancy costs to Style’s department using the current allocation method.
2. Allocate the building rent cost to Style’s department in proportion to the relative market value of the
floor space. Allocate to Style’s department the lighting and cleaning costs in proportion to the square
feet occupied (ignoring floor space market values). Then, compute the total occupancy cost allocated
to Style’s department.
3. Which allocation method (1 or 2) produces the lowest allocated occupancy cost for a manager of a
basement department?

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps with 4 images

Blurred answer
Knowledge Booster
Cost allocation
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education