REQUIRED: 1. Allocate occupancy costs to the Diaz and Wright departments using t

Question

REQUIRED:

1. Allocate occupancy costs to the Diaz and Wright departments using the current allocation method.

2. Allocate the depreciation, intrest, and taxes occupancy costs to the Diaz and Wright departments in proportion to the relative market values of the floor space. Allocate the heating, lighting, and maintenance costs to the Diaz and Wright departments in proportion to the square feet occupied (ignoring floor space market values).

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

Explanation / Answer

First we separate the fixed from the variable costs. The fixed costs are depreciation, interest and taxes and add up to $79,500. The variable costs are gas, lighting and maintenance and add up to $16,500. Then we assume each floor has 1/2 the total gross building area, or 6,000 sq.ft., as nothing to the contrary is specified.

Since the first floor space is 3 times as valuable as the second floor space, it bears 75% of the fixed cost and the second floor bears 25% of those costs. The fixed costs are $79,500, allocated at 75% to the first floor or $59,625/6,000 = $9.94/sq.ft. The second floor space is $19,875/6,000 = $3.31/sq.ft.

The variable expenses are $16,500/12,000 = $1.38/sq.ft.

Allocation of costs:
Diaz (1,000sf of 1st floor) = (1,000*9.94) + (1,000*1.38) = 9,940 + 1,380 = 12,320
Wright (1,700sf of 2nd floor) = (1,700*3.31) + (1,700*1.38) = 5,627 + 2,346 = 7,973

There, problem solved. I don't know how you came up with 30,000, as each department only takes up a portion of the respective floor area on each floor.

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