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 $40 per square foot and second-floor space worth $10 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.)

Answer 1

2	Occupancy costs based on market value:
			$
	Depreciation		31500
	Interest		47250
	Taxes		14000
	Total		92750
	Total market value:
					First floor	Second floor
	Square footage			a	7000	7000
	Market value per floor			b	40	10
	Total market value			a*b	280000	70000
	Allocation %				80%	20%
					280000/(280000+70000)	70000/(280000+70000)
	Cost per square footage:
					First floor	Second floor
	Allocation of occupancy cost			a	74200	18550
					(92750*80%)	(92750*20%)
	Square footage			b	7000	7000
	Cost per square footage			a/b	10.60	2.65
	Usage based cost-allocation rate=Heating,lighting and maintenance cost/Total square footage=(4375+5250+9625)/14000=19250/14000=1.375=$ 1.38 per square footage
	Total allocation rate:
					First floor	Second floor
	Cost per square footage based on Market				10.60	2.65
	Cost per square footage based on usage				1.38	1.38
	Total				11,98	4.03
	Allocation to departments:
	Department		Square footage	Rate	Total
	Linder's department		900	11,98	10782
	(First-floor)
	Chira's department		1900	4.03	7657
	(Second-floor)

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