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.
  

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 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 $40 per square foot and second-floor space worth $20 per square foot (excluding costs for heating, lighting, and maintenance).

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 Required: 1. Allocate occupancy costs to the Linder and Chiro departments using the current allocation method. (Round cost answers to 2 decimal places.) Department Square Footage Rate Total Linder's Dept. Chiro's Dept. 1,000 1,80?

Explanation / Answer

Answer for 1)

8

[$112000÷14000]

8

[$112000÷14000]

Answer for 2)

Market value of spaces:

First floor=$40×7000sq footage=$280000

Linder's department=$40×1000sq footage=$40000

Second floor=$20×7000sq footage=$140000

Chiro's department=$20×1800sq footage=$3600

The depreciation,interest and taxes based on market value allocated to each floor:

First floor:

[$(31500+47250+14000)×$280000/($280000+$140000)]

=$61833.33

Per sq feet:$61833.33/7000=$8.83 per sq feet

Second floor:

[$(31500+47250+14000)×$140000/($280000+$140000)]

=$30916.67

Per sq feet:$30916.67/7000sq feet=$4.42 per sq feet

Allocation of lighting,heating and maintainance per sq feet:

[$4375+5250+9625)/14000]=$1.38 per sq feet.

Allocation of costs for department

10.21

($8.83+$1.38)

5.8

[$4.31+$1.38]

Note: Difference may be caused due to round off.

Department Square footage Rate($) Total($) Linder's department 1000

8

[$112000÷14000]

8000 Chiro's department 1800

8

[$112000÷14000]

14400

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