Question
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
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.
DepreciationBuilding $ 36,000
InterestBuilding mortgage 54,000
TaxesBuilding and land 16,000
Gas (heating) expense 5,000
Lighting expense 6,000
Maintenance expense 11,000
Total occupancy cost $ 128,000
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 1,900 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 $40 per square foot and second-floor space worth $10 per square foot (excluding costs for heating, lighting, and maintenance).
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