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# Allocation of building occupancy costs to Linder and Chiro's departments of National Bank

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Problem 27-1A Allocation of building occupancy costs to departments LO3

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 1,700 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 \$35 per square foot and second-floor space worth \$30 per square foot (excluding costs for heating, lighting, and maintenance).

Requirement 1:

Allocate all occupancy costs to the Linder and Chiro departments using the current allocation method. (Round your answer to the nearest whole number. Omit the "\$" sign in your response.)

Department

Square Footage

Rate

Total

Linder's Department \$ \$
Chiro's Department \$

Requirement 2:

(a)

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. (Round the rate to two decimal places. Round your answers to the nearest whole number. Omit the "\$" sign in your response.)

Department

Square Footage

Rate

Total

Linder's Department

\$

\$

Chiro's Department

\$

(b)

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 the rate to two decimal places. Round your answer to the nearest dollar amount. Omit the "\$" sign in your response. )

Department

Square Footage

Rate

Total

Linder's Department

\$

\$

Chiro's Department

\$

(c)

Compute the total amount to be allocated to the Linder and Chiro departments. (Omit the "\$" sign in your response.)

Department

Total Costs

Linder's Department

\$

Chiro's Department

\$

3.

Which allocation method would you prefer if you were a manager of a second-floor department?

ABC Method
Market Value
Current Method
Square Footage