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	$	18,000
Interest—Building mortgage		27,000
Taxes—Building and land		8,000
Gas (heating) expense		2,500
Lighting expense		3,000
Maintenance expense		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.

Diane Linder manages a first-floor department that occupies 1,100 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).

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.

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.)

	Department Square Footage Rate Total Linder’s Department Chiro’s Department

Answer 1

1. Allocate occupancy costs to the Linder and Chiro departments using the current allocation method.

Department	Square Footage	Rate	Total
Linder's Dept	1100	8	8800
Chiro's Dept	1900	8	15200

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).

Department	Square footage	Rate	Total
Linder's Dept	1100	10.21	11229
Chiro's Dept	1900	5.79	11004

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.
Depreciation—Building	18,000
Interest—Building mortgage	27,000
Taxes—Building and land	8,000
Total cost	53,000
Market value of Ist floor	160,000	(4000*40)
Market value of 2nd floor	80,000	(4000*200
Total market value of both floors	240,000
Cost of Ist floor	35,333	(53000*160,000/240,000)
Cost of 2nd floor	17,667	(53000*80000/240,000)
Cost per square feet
Cost of Ist floor	8.83	(35,333/4000)
Cost of 2nd floor	4.42	(17,667/4000)
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).
Gas (heating) expense	2,500
Lighting expense	3,000
Maintenance expense	5,500
Total cost	11,000
Square feet of 1st floor	4,000
Square feet of 2nd floor	4,000
Total square feet	8,000
Cost of Ist floor	5500	(11000*4000/8000)
Cost of 2nd floor	5500	(11000*4000/8000)
Cost per square feet
Cost of Ist floor	1.38
Cost of 2nd floor	1.38
Total cost per square feet
Cost of Ist floor	10.21	(8.83+1.38)
Cost of 2nd floor	5.79	(4.42+1.38)