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    Cost allocation

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    Marshall's has several departments that occupy all floors of a two-story building that includes a basement floor. Marshall rented this building under a long-term lease negotiated when rental raes were low. 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 are attached.

    The building has 7,500 square feet on each of the upper two floors but only 5,000 square feet in the basement. In prior periods, the accounting manager merely divided the $372,000 occupancy cost by 20,000 square feet find an average cost of $18.60 per square foot and then charged each department a building occupancy cost equal to this rate times the number of square feet that it uppupies.

    Riley Miller manages a departments that occupies 2,000 square feet of basement floor space. Indiscussing the departmental reports with other managers, she questions whether using the same rate per square foot for all departments makes sense becasue different floors space has different values. Miller checked a recent real estate report of average local rental costs for similar space that shows first-floor space worth $48 per square foot, second-floor space worth $24 per square foot, and basement space worth $12 per square foot (excluding costs for lighting and cleaning)

    1. Allocate occupancy costs to Miller's department using current allocation method.

    2. Allocate the building rent cost to Miller's department in production to the relative market value of the floor space. Allocate to Miller's department the lighting and heating costs in proportion to the square feet occupied (ignoring floor space market values). Then, compute the total occupancy cost allocated to Miller's department.

    3. Which allocaion method would you prefer if you were a manager of a basement department?

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    Solution Summary

    The solution explains how to allocate the cost using the given methods