Pleae follow chart layout and provide an explanation. Thank you. National Bank h
ID: 1215068 • Letter: P
Question
Pleae follow chart layout and provide an explanation. Thank you.
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 $ 36,000 Depreciation-Building Interest-Building mortgage Taxes-Building and land Gas (heating) expense Lighting expense Maintenance expense 54,000 16,000 5,000 6,000 11,000 128,000 Total occupancy cost 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)Explanation / Answer
(1) Current Allocation Method
(2) New Method
Total Floor space of Linder and Chiro out together = 1000+1800 = 2800 Sq. feet
Market Value of Floor space = $40 First Floor (Limder) & $10 2nd floor (Chiro)
we can take ratio as 4:1 to divide the cost
Ratio og floor space = 1000 : 1800 or 1:1.8
Total cost for Depreciation, Interest & taxes = 106000; Allocation with 4:1 ratio - Linder = 84800 and Chiro = 21200
Total of gas, lighting & maintenance = $22000; Allocation with 1:1.8 ratio - Linder = 7857.14 and Chiro = 14142.86
Department Square Footage Rate Total Linder's Dept. 1000 8 8000 Chiro's Dept. 1800 8 14400