Chapter 9, Problem 7QS

To determine

Cost Allocation:

Sometime a cost is incurred for a whole firm and not for a particular department. In this case cost allocation is used. It is a way through which a particular cost is assigned to the respective department.

To compute: Allocation of rental expense to each department.

Explanation of Solution

Jewelry department:

Given,
Area occupied by this department is 1,440 square feet.
Total area of first floor is 4,800 square feet.
Total first floor rent is $84,500.

Formula to calculate rental expense,

$\text{Rental}\text{expense}=\frac{\text{Area}\text{occupied}\text{by}\text{this}\text{department}}{\text{Total}\text{area}\text{of}\text{first}\text{floor}}\times \text{Total}\text{first}\text{floor}\text{rent}$

Substitute, 1,440 square feet for area occupied by this department, 4,800 square feet for total area of first floor and $84,500 for Total first floor rent in the above equation.

$\begin{array}{c}\text{Rental}\text{expense}=\frac{1,440}{4,800}\times \$84,500\\ =\$25,350\end{array}$

Hence, rental expense of jewelry department is $25,350.

Working notes:

Calculation for first floor rent,

$\begin{array}{c}\text{First}\text{floor}\text{rent}=\text{Rent}\text{percentage}\times \text{Total}\text{rent}\\ =\frac{65}{100}\times \$130,000\\ =\$84,500\end{array}$

Cosmetic department:

Given,
Total first floor rent is $84,500.
Jewelry department rent is $25,350.

Formula to calculate rental expense,

$\text{Rental}\text{expense}=\text{Total}\text{first}\text{floor}\text{rent}-\text{Jewelry}\text{department}\text{rent}$

Substitute, $84,500 for the first floor rent and $25,350 for jewelry department rent in the above equation.

$\begin{array}{c}\text{Rental}\text{expense}=\$84,500-\$25,350\\ =\$59,150\end{array}$

Hence, cosmetics department rent is $59,150.

House wares department:

Given,
Area occupied by this department is 2,016 square feet.
Total area of second floor is 4,800 square feet.
Total second floor rent is $45,500.

Formula to calculate rental expense,

$\text{Rental}\text{expense}=\frac{\text{Area}\text{occupied}\text{by}\text{this}\text{department}}{\text{Total}\text{area}\text{of}\text{second}\text{floor}}\times \text{Total}\text{second}\text{floor}\text{rent}$

Substitute, 2,016 square feet for area occupied by this department, 4,800 square feet for total area of second floor and $45,500 for total second floor rent in the above equation.

$\begin{array}{c}\text{Rental}\text{expense}=\frac{2,016}{4,800}\times \$45,500\\ =\$19,110\end{array}$

Hence, rental expense of house wares department is $19,110.

Working notes:

Calculation for second floor rent,

$\begin{array}{c}\text{Second}\text{floor}\text{rent}=\text{Rent}\text{percentage}\times \text{Total}\text{rent}\\ =\frac{35}{100}\times \$130,000\\ =\$45,500\end{array}$

Tools department:

Given,
Area occupied by this department is 960 square feet.
Total area of second floor is 4,800 square feet.
Total second floor rent is $45,500.

Formula to calculate rental expense,

$\text{Rental}\text{expense}=\frac{\text{Area}\text{occupied}\text{by}\text{this}\text{department}}{\text{Total}\text{area}\text{of}\text{second}\text{floor}}\times \text{Total}\text{second}\text{floor}\text{rent}$

Substitute, 960 square feet for area occupied by this department, 4,800 square feet for total area of second floor and $45,500 for total second floor rent in the above equation.

$\begin{array}{c}\text{Rental}\text{expense}=\frac{960}{4,800}\times \$45,500\\ =\$9,100\end{array}$

Hence, rental expense of tools department is $9,100.

Shoes department:

Given,
Area occupied by this department is 1,824 square feet.
Total area of second floor is 4,800 square feet.
Total second floor rent is $45,500.

Formula to calculate rental expense,

$\text{Rental}\text{expense}=\frac{\text{Area}\text{occupied}\text{by}\text{this}\text{department}}{\text{Total}\text{area}\text{of}\text{second}\text{floor}}\times \text{Total}\text{second}\text{floor}\text{rent}$

Substitute, 1,824 square feet for area occupied by this department, 4,800 square feet for total area of second floor and $45,500 for total second floor rent in the above equation.

$\begin{array}{c}\text{Rental}\text{expense}=\frac{1,824}{4,800}\times \$45,500\\ =\$17,290\end{array}$

Hence, rental expense of shoes department is $17,290.