National Bank has several departments that occupy both floors of a two-story bui
ID: 2456953 • Letter: N
Question
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.
The building has 4,000 square feet on each floor. In prior periods, the accounting manager merely divided the $64,000 occupancy cost by 8,000 square feet to find an average cost of $8 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 900 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).
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.
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). (Round your intermediate calculations to 2 decimal places.) Department Square Footage Rate Total Linder's Dept Linder's DeptExplanation / Answer
Answer to the Question No 1:
First we have to separate the fixed costs from the variable costs as we have some real estate study values that exclude variable costs heating, lighting and maintenance.
The fixed costs are depreciation ($18,000), interest ($27,000) and taxes ($8,000).
Total fixed costs = $53,000.
The variable costs are gas ($2,500), lighting ($3,000) and maintenance ($5,500).
Total variable costs = $11,000.
Here each floor has 4,000 square feet area.
Diane Linder’s department occupies 900 square feet in first floor.
Juan Chiro’s department occupies 1800 square feet in second floor.
As per the rear estate study given in the question,
First floor rent = $30 per square feet (excluding variable costs)
Second floor rent = $20 per square feet (excluding variable costs)
From the above values we can conclude that the first floor space is 1.5 times as valuable as the second floor space, it bears 60% of the fixed cost and the second floor bears 40% of those costs.
The fixed costs allocated at 60% to the first floor = $53,000/4,000 *60/100
= $7.95 per square feet
The fixed costs allocated at 40% to the second floor = $53,000/4,000 *40/100
= $5.3 per square feet
Since variable expenses are not divided based on floor, they will be equally distributed to each department.
The variable expenses = $11,000/8,000
= $1.38 per square feet
Total cost for first floor = Fixed cost + variable cost
= $7.95 + $1.38
= $9.33 per square feet
Total cost for second floor = Fixed cost + variable cost
= $5.3 + $1.38
= $6.68 per square feet
Department
Square footage
Rate
Total
Linder’s department
900
9.33
$8,397
Chiro’s department
1800
6.68
$12,024
Department
Square footage
Rate
Total
Linder’s department
900
9.33
$8,397
Chiro’s department
1800
6.68
$12,024
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