City Bank has several departments that occupy both floors of a two-story buildin

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 $ 31,500

Interest - Buidling Mortgage 47,25

Taxes - Building & Land 14,000

Gas (Heating) Expense 4,375

Lighting Expense 5,250

Maintenance Expense 9,625

_____________________________

Total Occupancy Cost $112,00

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.

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).

Allocate occupancy costs to the Diaz and Wright departments using the current allocation method

Diaz's Department $ ________

Wright's Department $ _______

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.)

Diaz's Department $ ________

Wright's Department $ _______

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.

Explanation / Answer

For #1, we are told to use the current method to allocate the overhead costs. We are given that the total overhead is $112,000. If you divide this by the number of square feet in the building we get $112,000 / 14,000 = $8, which is exactly what the problem says. Diaz's overhead is 900 * $8 = $7,200, and Wright's overhead is 1,800 * $8 = $14,400.

For #2, we have to calculate the new method for allocating overhead. We cannot use those rates of $40 and $10, or we end up with overhead numbers way higher than the actual. Instead, we must use the ratio of 4:1 to calculate the rates. However, we don't use this for the total overhead, we are only allocating depreciation, interest, and taxes with this method. This gives us a total of $31,500 + $47,250 + $14,000 = $92,750 to allocate using the new method. If we divide that overhead by five we can get the total amount of overhead for the second floor: $92,750 / 5 = $18,550. If we multiply this by four, then we get the total overhead for the first floor: $18,550 * 4 = $74,200. Now divide both of those by the amount of square feet per floor. Each floor is 7,000sqft. So the second floor's rate is $18,550 / 7,000sqft = $2.65 / sqft, and the first floor's rate is $74,200 / 7,000sqft = $10.60/sqft. Using these rates, Diaz's overhead is 900 * $10.60 = $9,540, and Wright's overhead is 1,800 * $2.65 = $4,770. However, we still need to add in the gas, lighting, and maintenance. These expenses total to $4,375 + $5,250 + $9,625 = $19,250. These are allocated strictly on sqft, so we divide the whole amount by 14,000 to get a rate of $19,250 / 14,000sqft = $1.38/sqft. For Diaz we have the $9,540 from before plus 900 * $1.38 = $1,242 for a total of $10,782. For Wright we have the $4,770 from before plus 1,800 * $1.38 = $2,484 for a total of $7,254. I tried to follow the rounding guidelines given by the problem, it is weird to me to round intermediate steps.

I hope this helps! If you need further explanation, just leave a comment.

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