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 1,700 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

Solution:

As per the question we need to allocate depreciation, interest and taxes occupancy costs in proportion of the relative market values of the floor space.

Market value of first floor = $ 40

Market value of second floor = $ 10

Total market value = $ 50

So , ratio of first floor market value to total market vslue = $ 40/ $50 = 80%

ratio of second floor market value to total market vslue = $ 10/ $50 = 20%

	Amount($)	First floor (80%)	Second floor (20%)
Depreciation - Building	31,500	31,500 x 80% = 25,200	31,500 x 20% = 6,300
Interest—Building mortgage	47,250	47,250 x 80% = 37,800	47,250 x 20% = 9,450
Taxes—Building and land	14,000	14,000 x 80% = 11,200	14,000 x 20% = 2,800

After allocating the cost to each floor , we now allocate the cost to the respective departments of Diane Linder and Juan Chiro which are located on the first and second floor respectively.

Ratio of Linder's department to total space of first floor = 900/7000 = (9/70)

Ratio of Chiro's department to total space of second floor = 1700/7000 = (17/70)

	Linder (9/70)	Chiro (17/70)
Depreciation - Building	25,200 x (9/70) = 3,240	6,300 x (17/70) = 1,530
Interest—Building mortgage	37,800 x (9/70) = 4,860	9,450 x (17/70) = 2,295
Taxes—Building and land	11,200 x (9/70) = 1,440	2,800 x (17/70) = 680
Total	9,540	4,505

Now, we allocate the heating, lighting, and maintenance costs to the Linder and Chiro departments in proportion to the square feet occupied.

Total square feet = 7000 for each floor = 14,000 square feet

Proportion of square feet occupied by Linder = (900/14000) = (9/140)

Proportion of square feet occupied by Chiro = (1700/14000) = (17/140)

	Amount ($)	Linder (9/140)	Chiro (17/140)
Gas (heating) expense	4,375	4,375 x (9/140) = 281.25	4,375 x (17/140) = 531.25
Lighting expense	5,250	5,250 x (9/140) = 337.5	5,250 x (17/140) = 637.5
Maintenance expense	9,625	9,625 x (9/140) = 618.75	9,625 x (17/140) = 1,168.75
Total		1,237.5	2,337.5

So, Total expenses allocated to linder and chiro's department are:

Expense	Linder ($)	Chiro ($)
Depreciation - Building	3,240	1,530
Interest—Building mortgage	4,860	2,295
Taxes—Building and land	1,440	680
Gas (heating) expense	281.25	531.25
Lighting expense	337.5	637.5
Maintenance expense	618.75	1,168.75
Total	10,777.5	6,842.5