National Bank has several departments that occupy both floors of a two-story building. 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. Depreciation—Building $18,000 Interest—Building mortgage . 27,000 Taxes—Building and land 9,000 Gas (heating) expense . 3,000 Lighting expense . 3,000 Maintenance expense . 6,000 Total occupancy cost . $66,000 The building has 4,000 square feet on each floor. In prior periods, the accounting manager merely divided the $66,000 occupancy cost by 8,000 square feet to find an average cost of $8.25 per square foot and then charged each department a building occupancy cost equal to this rate times the number of square feet that it occupied. Diane Linder manages a first-floor department that occupies 1,000 square feet, and Juan Chiro manages a second-floor department that occupies 1,800 square feet of floor space. In discussing the departmental reports, the second-floor manager questions whether using the same rate per square foot for all departments makes sense because the first-floor space is more valuable. This manager also references a recent real estate study of average local rental costs for similar space that shows first-floor space worth $30 per square foot and second-floor space worth $20 per square foot (excluding costs for heating, lighting, and maintenance). Required 1. Allocate occupancy costs to the Linder and Chiro departments using the current allocation method. 2. Allocate the depreciation, interest, and taxes occupancy costs to the Linder and Chiro departments in proportion to the relative market values of the floor space. Allocate the heating, lighting, and maintenance costs to the Linder and Chiro departments in proportion to the square feet occupied (ignoring floor space market values). 3. Which allocation method (1 or 2) produces the lowest allocated occupancy cost for a manager of a second-floor department?
National Bank has several departments that occupy both floors of a two-story building. 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.
Interest—Building mortgage . 27,000
Taxes—Building and land 9,000
Gas (heating) expense . 3,000
Lighting expense . 3,000
Maintenance expense . 6,000
Total occupancy cost . $66,000 The building has 4,000 square feet on each floor. In prior periods, the
the $66,000 occupancy cost by 8,000 square feet to find an average cost of $8.25 per square foot and then
charged each department a building occupancy cost equal to this rate times the number of square feet that
it occupied.
Diane Linder manages a first-floor department that occupies 1,000 square feet, and Juan Chiro manages
a second-floor department that occupies 1,800 square feet of floor space. In discussing the departmental
reports, the second-floor manager questions whether using the same rate per square foot for all
departments makes sense because the first-floor space is more valuable. This manager also references a
recent real estate study of average local rental costs for similar space that shows first-floor space worth
$30 per square foot and second-floor space worth $20 per square foot (excluding costs for heating, lighting,
and maintenance).
Required
1. Allocate occupancy costs to the Linder and Chiro departments using the current allocation method.
2. Allocate the depreciation, interest, and taxes occupancy costs to the Linder and Chiro departments in
proportion to the relative market values of the floor space. Allocate the heating, lighting, and maintenance
costs to the Linder and Chiro departments in proportion to the square feet occupied (ignoring
floor space market values).
3. Which allocation method (1 or 2) produces the lowest allocated occupancy cost for a manager of a
second-floor department?
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