[The following information applies to the questions displayed below.,] City Bank

Question

[The following information applies to the questions displayed below.,] City 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 Interest-Building mortgage Taxes-Building and land Gas (heating) expense Lighting expense Maintenance expense $ 18,000 27,000 8,000 2,500 3,000 5,500 Total occupancy cost 64,000 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. Laura Diaz manages a first-floor department that occupies 1,100 square feet, and Lauren Wright 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 $20 per square foot (excluding costs for heating, lighting, and maintenance).

Explanation / Answer

Ans. 1 Allocation of occupancy cost as per current cost allocation method

Average cost per occupancy square feet = $8

Diaz's Dept. (1100X8) = $8800

Wright's Dept. (1900x8) = $15200

2. Cost allocation cost as per revised method

Step: 1

Allocation of depreciation,interest, and taxed occupancy cost for First floor        = $30 square feet

Allocation of depreciation,interest, and taxed occupancy cost for Second floor = $20 square feet

Calculation of Heating,lighting and maintenance (Amenties) cost per square feet(2500+3000+5500) =11000/8000 = 1.375 per square feet.

Step 2. Allocation of occupancy cost (value in $)

                                                                 Diaz's dept.                         Wright's Dept.

Rent as per market value 33000        38000                                                                (1100X30 )                          (1900X20)

Other Amenties cost heating,lighting,maintenance cost)

(1100X1.375)                                                                                            1513                                    -

(1900X1.375)                                                                                              -                                     2613

Total allocation cost                                                                             34513                                40613

Allocated occupancy cost

Diaz's dept.                      = $34513

Wright;s dept.                 = $40613

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