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...

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 $18,000

Interest—Building mortgage . 27,000

Taxes—Building and land 9,000

Gas (heating) expense . 3,000

Lighting expense . 3,000

Maintenance expense . 6,000

Total occupancy cost . $66,000 The building has 4,000 square feet on each floor. In prior periods, the accounting manager merely divided

the $66,000 occupancy cost by 8,000 square feet to find an average cost of $8.25 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

$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 Linder and Chiro departments using the current allocation method.

2. 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. 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).

3. Which allocation method (1 or 2) produces the lowest allocated occupancy cost for a manager of a

second-floor department?