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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 1,800 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 $40 per square foot and second-floor space worth $10 per square foot (excluding costs for heating, lighting, and maintenance).

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). (Round cost answers to 2 decimal places. Round your intermediate calculations to 2 decimal places.)

Answer 1

National Bank Market rates are used to allocate occupancy costs for depreciation, interest, and taxes. Heating, lighting, and maintenance costs are allocated to the departments on both floors at the average rate per square foot. These costs are separately assigned to each class as follows: Value Based Usage Based Total Costs Costs Costs Depreciation-Building 36000 36000 Interest-Building mortgage Taxes-Building and land Gas (heating) expense 54000 54000 16000 16000 5000 5000 6000 Lighting expense 6000 Maintenance expense 11000 11000 Total 128000 106000 22000 Value-based costs are allocated to departments in two steps (i) Compute market value of each floor Square Value per Sq. Ft Floor Footage Total First floor 8000 40 320000 Second floor 8000 10 80000 Total market value 400000 (ii) Allocate $106,000 to each floor based on its percent of market value Allocated Market % of Cost Floor Value Total Cost per Sq. Ft First floor 80% 320000 84800 10.6 Second floor 80000 20% 21200 2.65 Total market value 100% 106000 400000 Usage-based costs allocation rate $22000/ 16000 sq.ft -$1.38 per sq. ft. We can then compute total allocation rates for the floors Floor Value Total Usage First floor 10.6 1.38 11.98 Second floor 2.65 1.38 4.03 These rates are applied to allocate occupancy costs to departments Square Department Linder's Department Chiro's Department Rate Total Footage 1000 11.98 11980 1800 4.03 7254