Question:
City Bank has several departments that occupy both floors of a two-story building. The depart mental 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.
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Depreciation-Building
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$18,000
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Interest-Building mortgage
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27,000
|
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Taxes-Building and land
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8,000
|
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Gas (heating) expense
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2,500
|
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Lighting expense
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3,000
|
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Maintenance expense
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5,500
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Total occupancy cost
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$64,000
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The building has 4,000 square feet on each floor. In prior periods, the accounting manager merely divided the $64,000 occupancy cost by 8,000 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. Laura Diaz manages a first-floor department that occupies 1,000 square feet, and Lauren Wright 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 $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 Diaz and Wright departments using the current allocation method.
2. Allocate the depreciation, interest, and taxes occupancy costs to the Diaz and Wright departments in proportion to the relative market values of the floor space. Allocate the heating, lighting, and maintenance costs to the Diaz and Wright departments in proportion to the square feet occupied (ignoring floor space market values).
3. Which allocation method would you prefer if you were a manager of a second-floor department? Explain.