National Bank has several departments that occupy both floors of a two-story bui

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 $36,000 Depreciation-Building Interest-Building mortgage Taxes-Building and land Gas (heating) expense Lighting expense Maintenance expense 54,000 16,000 5,000 6,000 11,000 128,000 Total occupancy cost The building has 8,000 square feet on each floor. In prior periods, the accounting manager merely divided the $128,000 occupancy cost by 16,000 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 1,000 square feet, and Juan Chiro 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)

Explanation / Answer

Department Sq feet area Rate /sq foot Relative market value % wt relative market Value % wt sq foor area Linder's Department                            1,000                                 40                     40,000 68.97% 35.71% Chiro's Dept                          1,800                                 10                     18,000 31.03% 64.29% Total                          2,800                     58,000 Allocation of Expenses Cost Details Total Cost   Allocation Basis Linder's Dept Chiro's Dept Depreciation                          36,000 Relative market value of floor space                     24,828                 11,172 Interest on Mortgage                        54,000 -do-                     37,241                 16,759 Taxes , Building & Land                        16,000 -do-                     11,034                    4,966 Heating Expense                          5,000 Ratio of Sq feet                       1,786                    3,214 Lighting expense                          6,000 Ratio of Sq feet                       2,143                    3,857 Maintenance                        11,000 Ratio of Sq feet                       3,929                    7,071 Total Allocated Expenses                     80,961                 47,039

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