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	$	27,000
Interest—Building mortgage		40,500
Taxes—Building and land		12,000
Gas (heating) expense		3,750
Lighting expense		4,500
Maintenance expense		8,250
Total occupancy cost	$	96,000

  

The building has 6,000 square feet on each floor. In prior periods, the accounting manager merely divided the $96,000 occupancy cost by 12,000 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 1,700 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 $10 per square foot (excluding costs for heating, lighting, and maintenance).

References

Section BreakDifficulty: 3 HardLearning Objective: 21-P1 Assign overhead costs using twostage cost allocation.

1.

value:
10.00 points

Required information

Required:

1.	Allocate occupancy costs to the Diaz and Wright departments using the current allocation method. (Omit the "$" sign in your response.)

    

Department	Total
Diaz’s Dept.	$
Wright's Dept.	$

References

WorksheetLearning Objective: 21-C3 Appendix 21A-Explain transfer pricing and methods to set transfer prices.

Difficulty: 3 HardLearning Objective: 21-P1 Assign overhead costs using twostage cost allocation.

Check my work

2.

value:
20.00 points

Required information

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). (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.)

    

Department	Total
Diaz’s Dept.	$
Wright's Dept.	$

Answer 1

1)Allocation = Allocation rate * Space occupied

Diaz’s Dept. : 8* 900 = $ 7200

Wright's Dept. : 8 *1700 = $ 13600

2)

	Total cost	Total allocation base	Diaz’s Dept.	Wright's Dept.
Depreciation—Building+Interest—Building mortgage +Taxes—Building and land	27000+40500+12000 79500	[30*6000]First floor =180000 [6000*10]second floor = 60000 Total=180000+60000=240000	% of allocation 180000/240000 .75 or 75%	% of allocation\ 60000/240000 .25 or 25%
			79500*75%= 59625	79500*25%=19875
per unit			59625/6000 =$ 9.94 per sq ft	19875/6000 =$ 3.31
heating, lighting, and maintenance costs	3750+4500+8250 =16500	16500/12000 =$ 1.38 per sq ft	1.38	1.38
Total cost per sq ft			$ 11.32	$ 4.69

Diaz’s Dept. : 900*11.32 =$ 10188

Wright's Dept. = 1700*4.69 =$ 7973