Citizens 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 . . . . . . . . . . . $ 31,500
Interest—Building mortgage . . . . . . . . 47,000
Taxes—Building and land . . . . . . . . . . 14,000
Gas (heating) expense . . . . . . . . . . . . . . . 4,425
Lighting expense . . . . . . . . . . . . . . . . . . 5,250
Maintenance expense . . . . . . . . . . . . . . . 9,625
Total occupancy cost . . . . . . . . . . . . . $111,800
The building has 5,000 square feet on each floor. In prior periods, the accounting manager merely divided the $111,800 occupancy cost by 10,000 square feet to find an average cost of $11.18 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.
Helen Lanya manages a first-floor department that occupies 1,000 square feet, and Jose Jimez 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 $40 per square foot and second-floor space worth $10 per square foot (excluding costs for heating, lighting, and maintenance).
Required
1. Allocate occupancy costs to the Lanya and Jimez departments using the current allocation method.
2. Allocate the depreciation, interest, and taxes occupancy costs to the Lanya and Jimez departments in proportion to the relative market values of the floor space. Allocate the heating, lighting, and maintenance costs to the Lanya and Jimez departments in proportion to the square feet occupied (ignoring floor space market values). Analysis Component
3. Which allocation method would you prefer if you were a manager of a second-floor department?
Explain.