# Allocation of occupancy costs

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 $ 22,500

Interest?Building mortgage 33,750

Taxes?Building and land 10,000

Gas (heating) expense 3,125

Lighting expense 3,750

Maintenance expense 6,875

Total occupancy cost $ 80,000

The building has 5,000 square feet on each floor. In prior periods, the accounting manager merely divided the

$80,000 occupancy cost by 10,000 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 1,100 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).

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 Dept

Chiro's Dept

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 your answers to the nearest whole number. Omit the "$" sign in your response.)

Floor Market Value % of total Allocation cost

First Floor

(Linder's Department)

Second Floor

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

Usage based cost allocation rate =

(c) What is the total cost allocated to each department based on value and usage?

Floor Value per sq ft Usage per sq ft Total per square ft

First Floor

Second Floor

Department Square Footage Rate Total

Linder's Dept

Chiro's Dept

https://brainmass.com/business/cost-allocation-of-service-department-costs/allocation-of-occupancy-costs-211174

#### Solution Preview

Please refer attached document for better clarity of tables.

Solution:

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 Dept 1100 8 8800

Chiro's Dept 1900 8 15200

2)

(a) Allocate the depreciation, interest, and taxes occupancy costs to the Linder and Chiro departments in proportion to the relative market values ...

#### Solution Summary

Solution describes the steps to allcoate occupancy costs to two departments of National Bank.