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. Depreciation—Building $ 36,000 Interest—Building mortgage 54,000 Taxes—Building and land 16,000 Gas (heating) expense 5,000 Lighting expense 6,000 Maintenance expense 11,000 Total occupancy cost $ 128,000 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 1,900 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).

Required: 1. Allocate occupancy costs to the Linder and Chiro departments using the current allocation method. (Round cost answers to 2 decimal places.)

Answer 1

Required: 1.

Allocate occupancy costs to the Linder and Chiro departments using the current allocation method

Answer

AS it was given in the question that 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

So current allocation rate

=128,000/16,000

=$8 per square foot

Now we Allocate occupancy costs to the Linder and Chiro departments using the current allocation method as under

Department	Square Footage	Rate	Total
	A	B	C=A*B
Linder’s Dept.	1,000	8	8000
Chiro’s Dept.	1,900	8	15200