Chapter 9, Problem 2PSA

National Bank has several departments that occupy both of a two-story building. The departmental accounting system has a single account, Building Occupancy Cost, in its ledger. The types and amounts of costs recorded in this account for the current period follow.

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 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 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 (ignoring floor space market values).

Analysis Component

3. Which allocation method would you prefer if you were a manager of a second-floor department? Explain.