P21-1A
City Bank has several departments that occupy both floors of a two-story
building. The depart mental 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.
PROBLEM SET A P21-1A Allocation of building occupancy costs to departments
Depreciation—Building . . . . . . . . . .
. . . $18,000
Interest—Building mortgage . . . . . . . .
. 27,000
Taxes—Building and land . . . . . . . . .
. . 8,000
Gas (heating) expense . . . . . . . . . .
. . . . 2,500
Lighting expense . . . . . . . . . . . . .
. . . . . 3,000
Maintenance expense . . . . . . . . . . .
. . . 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. Laura Diaz manages a first-floor department that occupies 1,000
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 $30 per square foot
and second-floor space worth $20 per square foot (excluding costs for heating,
lighting, and maintenance).
Required
1.
Allocate occupancy costs to the Diaz and Wright departments using the current
allocation method.
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).
Analysis Component
3. Which allocation method would you prefer if you were a manager
of a second-floor department?
Explain.
Check (1) Total allocated to Diaz and Wright, $22,400 (2) Total occupancy
cost to Diaz, $9,330
SOLUTION
PREVIEW
| 1,000 | $ 8.00 | $ 8,000 |
| 1,800 | $ 8.00 | $ 14,400 |
File name: City-Bank-has.xls File
type: XLS Price: $12
