National Bank has several departments that occupy both floors of a two-story bui

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. Depreciation—Building $ 31,500 Interest—Building mortgage 47,250 Taxes—Building and land 14,000 Gas (heating) expense 4,375 Lighting expense 5,250 Maintenance expense 9,625 Total occupancy cost $ 112,000 The building has 7,000 square feet on each floor. In prior periods, the accounting manager merely divided the $112,000 occupancy cost by 14,000 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 1,900 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 $10 per square foot (excluding costs for heating, lighting, and maintenance).

Explanation / Answer

National Bank can not allocate all its cost on flat rate for areas occupied by the tenants.

Cost should be bifurcated as follows :

1. There are two ost under consideration, Fixed Cost and Variable Cost

a. .Fixed Cost : is the cost which Owner has to bare even if some of the are of departmental store is vecant.

It cosnsists of

The said fixed cost will be distributed on the basis of average local rental cost for each floor as per real estate study, calculation for the same is as follows :

b. Variable Cost : It consists of ,

2. As explained above total cost bifurcated floorwise will be :

  

Hence cost should be allocated to first floor @ $11.31 per sq feet and for second floor @ $4.69 per sq feet

Particulars Amount $ Depreciation Building $31,500 Mortgage Interest $47,250 Building & Land Taxes $14,000 Total $92,750

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