National bank has several departments that occupy both

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 follows.

Depreciation …building  $18,000

Interest-Building mortgate…..27,000

Taxes-Building and land………9,000

Gas(heating)expense.3000

Lighting expense…3000

Maintenance expense………6,000

Total occupancy cost $66,000

The building has 4,000 square feet on each floor, in prior periods, the accounting manager merely divided the $66,00 occupancy cost by 8,000 square feet to find an average cost of $8.25 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 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 all occupancy cost to the linder and chiro departments using the current allocation method.

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)

Analysis component

3.  Which allocation method would you prefer if you were a manager of second – floor department? Explain

TUTORIAL PREVIEW

(1) Compute market value of each floor space.

 Floor                                                  Square              Value per                     Total

                                                            Footage            Sq. Ft.

First                                                     4,000               $30                              $120,000

Second                                                 4,000                20                                   80,000

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