Fixed-cost allocation. Central University completed construction of its newest administrative building at the end of 2017. The University’s first employees moved into the building on January 1, 2018. The building consists of office space, common meeting rooms (including a conference center), a cafeteria, and even a workout room for its exercise enthusiasts. The total 2018 building space of 250,000 square feet was utilized as follows:
The new building cost the university $40 million and was depreciated using the straight-line method over 20 years with zero residual value so $2,000,000 per year. At the end of 2018 three departments occupied the building: executive offices of the president, accounting, and human resources. Each department’s usage of its assigned space was as follows:
1. How much of the total annual building cost of $2,000,000 will be allocated in 2018 to each of the departments, if the cost is allocated to each department on the basis of the following?
a. Actual usage of the three departments
b. Planned office space of the three departments
c. Practical capacity of the three departments
2. Assume that Central University allocates the total annual building cost of $2,000,000 in the following manner:
a. All vacant office space is absorbed by the university and is not allocated to the departments.
b. All occupied office space costs are allocated on the basis of actual square footage used by each department.
c. All common area costs are allocated on the basis of a department’s practical capacity. Calculate the cost allocated to each department in 2018 under this plan. Do you think the allocation method used here is appropriate? Explain.