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 3,000 square feet on each floor. In prior periods, the accounting manager merely divided the $48,000 occupancy cost by 6,000 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 $40 per square foot and second-floor space worth $20 per square foot (excluding costs for heating, lighting, and maintenance).

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 cost answers to 2 decimal places. Round your intermediate calculations to 2 decimal places.)

Depreciation—Building $ 13,500 Interest—Building mortgage 20,250 Taxes—Building and land 6,000 Gas (heating) expense 1,875 Lighting expense 2,250 Maintenance expense 4,125 Total occupancy cost $ 48,000

Explanation / Answer

Allocation of OH and OH rate for each floor First Second Depreciation (in 40:20) 9000 4500 Interest (in 40:20) 13500 6750 Taxes (in 40:20) 4000 2000 Gas 937.5 937.5 Lighting expense 1125 1125 Maintenance expense 2062.5 2062.5 Total Allocated OH cost 30625 17375 Divide: Number of Sq. ft area 3000 3000 OH cost per sq. feet 10.21 5.79 Department Sq. feet Rate Total Linder 900 10.21 9189 Chiro 1900 5.79 11001

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