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.

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 Interest-Building mortgage Taxes-Building and land Gas (heating) expense Lighting expense Maintenance expense $ 18,000 27,000 8,000 2,500 3,000 5,500 Total occupancy cost $ 64,000 The building has 4,000 square feet on each floor. In prior periods, the accounting manager merely divided the $64,000 occupancy cost by 8,000 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 $30 per square foot and second-floor space worth $20 per square foot (excluding costs for heating, lighting, and maintenance)

Explanation / Answer

Solution 1:

Soluton 2:

Rental cost of first floor space = 4000*30 = $120,000

Rental cost of 2nd floor space = 4000*20 = $80,000

Total rental cost of both floor = $200,000

Rental cost of Linder’s space = 900*30 = $27,000

Rental cost of Chiro space = $1900*20 = $38,000

Allocation of occupancy cost - Basis Square Footage area occupied Deparment Square Footage Rate Total Linder's Dept. 900 $8.00 $7,200.00 Chiro's Dept. 1900 $8.00 $15,200.00

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