Question

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	$	27,000
Interest—Building mortgage		40,500
Taxes—Building and land		12,000
Gas (heating) expense		3,750
Lighting expense		4,500
Maintenance expense		8,250
Total occupancy cost	$	96,000

  

The building has 6,000 square feet on each floor. In prior periods, the accounting manager merely divided the $96,000 occupancy cost by 12,000 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 900 square feet, and Lauren Wright 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 $10 per square foot (excluding costs for heating, lighting, and maintenance).

References

Section BreakDifficulty: 3 HardLearning Objective: 21-P1 Assign overhead costs using twostage cost allocation.

1.

value:
10.00 points

Required information

Required:

1.	Allocate occupancy costs to the Diaz and Wright departments using the current allocation method. (Omit the "$" sign in your response.)

    

Department	Total
Diaz’s Dept.	$
Wright's Dept.	$

References

WorksheetLearning Objective: 21-C3 Appendix 21A-Explain transfer pricing and methods to set transfer prices.

Difficulty: 3 HardLearning Objective: 21-P1 Assign overhead costs using twostage cost allocation.

Check my work

2.

value:
20.00 points

Required information

2.

Allocate the depreciation, interest, and taxes occupancy costs to the Diaz and Wright departments in proportion to the relative market values of the floor space. Allocate the heating, lighting, and maintenance costs to the Diaz and Wright departments in proportion to the square feet occupied (ignoring floor space market values). (Round your intermediate percentages of cost allocation to nearest whole percent. Round your cost per Sq. ft to 2 decimal places and round intermediate dollar amounts and final answers to the nearest whole number. Omit the "$" sign in your response.)

    

Department	Total
Diaz’s Dept.	$
Wright's Dept.	$

Answer 1

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1. Allocate occupancy costs to the Diaz and Wright departments using the current allocation method.
	A	B	A*B
Department	Floor Space Occupied	Allocation Rate per Sq Feet	Occupancy Cost Allocated
Diaz's	900	8	7200
Wright's	1800	8	14400
2. Allocation as Suggested in Que
Dep, Int and Tax	27000+40500+12000	79500
Heat, Ligh, Main	3750+4500+8250	16500
Dep, Int and Tax
	First Floor	Second Floor	Total
Total Floor Space	6000	6000
Rental Cost	40 per Sq Foot	10 per Sq Foot
Total Floor Cost	240000	60000	300000
Dep, Int and Tax			79500
Rate (Dep,int,tax/Floor cost)			0.265
Dep, Int and Tax
Department	Floor Space Occupied	Floor Rent	Relative Floor Rental	Rate	Allocation
Diaz's	900	40	36000	0.265	9540
Wright's	1800	10	18000	0.265	4770
Heat, Ligh, Main	16500
Total Floor Space	12000
Rate per sq feet	1.38
	A	B	A*B
Department	Floor Space Occupied	Allocation Rate per Sq Feet	Occupancy Cost Allocated
Diaz's	900	1.38	1242
Wright's	1800	1.38	2484
Total Allocation	Dep, Int and Tax	Heat, Ligh, Main	Total
Diaz's	9540	1242	10782
Wright's	4770	2484	7254
Total	14310	3726	18036