To: [AllCentre Staff]
Contributionto Office rent Calculation
This memorandum aimsto initiate a contribution by Centre’s staff towards the evaluationof various methods proposed for the calculation of the organizationsRental costs. As you all aware, the Accounting department hasidentified that the current rental cost paid by our organization istoo high. The reason behind the high rental costs is due to themethod adopted by the property owner to allocate costs. Consequently,an evaluation was conducted, and several alternatives were identifiedto assist in arriving at justifiable costs for Centre and revenuesfor the landlord (Horngren, 1999).
Attached, you will find the various alternativesthat have been developed, taking into consideration the size of ouroffice and number of the employees. The key approach used is thatBuilding costs are the greatest contributors towards costs.Consequently, the approaches have maximized the need to reduce theircontribution by applying variable rates as opposed to the marketrates. The costs marked in bold apply market rates while the regularfonts indicate variable rates. The reason behind the approach isthat the services are consumed at a different rate by the variousorganizations, and consequently, they should be billed differently.It is hence necessary to apportion these costs in proportion to thevolume consumed (Lawrence,1954).
The fundamentalassumptions in all the alternatives that there are costs that requirebilling based on the rate of consumption. Costs such as Supplies,Miscellaneous, property taxes, cleaning, Fuel oil or gas, electricity/ water are utilized differently depending on the number ofemployees. Consequently, such costs should be invoiced based on therate of consumption. First, property taxes depend on the amount ofsquare footage occupied. It is hence a variable cost since in Centerscase there is a small square footage occupation and it would beunfair to pay the same rates as other organizations with the highersquare footage. Consequently, Property taxes have been adjusted tovary with the square footage.
Supplies also need changing since various officesconsume supplies differently. For the calculation of the costs,supplies have been made variable since it is dependent on the amountof footage occupied. It is assumed that the higher the number ofsquare feet occupied by an organization, the greater the suppliesused. Consequently, supplies have been made variable with the rate ofspace occupied (Horngren, 1982).
The first alternative has a total cost of 13.07Dollars. The IT services have a total cost of 3.48 dollars while thebuilding costs have a total of 9.60 dollars. The alternative hasapplied variable rates of costs to the greater contributors to costsfor IT services with an intention of reducing the costs.Specifically, the method has arranged the various cost centersregarding their contribution to cost per square footage (Horngren,1982).
The advantage of the proposed alternative is areduction of the rental cost from the market rate of 35 dollars persquare unit to 23.23 dollars per square unit. The method isrational it has recognized the need to identify the rates of costcontribution by the various cost centers. Consequently, it makes iteasy to identify the cost centers that require furtherclassification. For example, the identification of greatestcontributors of costs stimulates further action about control. Themethod determines that the IT managed services are the highestcontributors to IT costs. Consequently, there is the need todetermine whether Centers employees should be billed at the same rateas other organizations. Therefore, a variable rate has been used tocalculate the final costs for Center. A similar approach applied tothe various cost centers with a variable rate used for the highestcontributors (Horngren, 1982).
The major disadvantage of the method is that it isexpensive compared to counterpart alternatives.
In alternative two, the total costs per squarefoot are 13.88 dollars. The costs of IT services amounts to 0.48dollars per square footage while the operational and building coststotal to 13.40. The IT services are variable about the percent ofspace occupied. The majority of the construction and consumptioncosts are fixed and are calculated at the market costs save for afew. Costs such as miscellaneous property expense, property taxes andcaretaking were apportioned about the space occupied. Thealternative considers costs such as the elevator as hard todistribute by usage due to the relative difficulty in establishingthe rate of use. Similar is the cost of fuel- Gas/ Oil, electricity,water, parking expense, repairs, and maintenance (Horngren, 1982).
The advantage of the approach in is that there isa reduction in the cost of space for Centre as compared to the totalapplication of the market rates in the billing.
Besides, the method has exonerated Centre frompaying for some of the services that it does not use directly at themarket rates such as the IT services by apportioning them at avariable rate. To the property owner, the method has establishedfairness as it has accepted the need for sharing costs such as theuse of the elevator. Such costs may be high, and it is also difficultto apportion the costs based on the rate of use (Horngren, 1982).
One of the disadvantages of the alternativeis the assumption that Centers employees do not fully utilize thebenefits from the IT services, which is not the case.
The total costs of alternative two are 21.48United States dollars. The IT services cost United States dollars12.82 while the building and operational costs amount to 8.66 dollarsper square unit. The alternative assumes that Centre utilizes all theIT services. Consequently, the IT services are calculated at marketrates and generate the highest costs for Centre. The Building andoperational costs are partly at the market rates and somewhat fixed.For example, the miscellaneous property taxes are variable dependingon the size of square footage. Similar is property taxes. Caringexpenses are valued at the market rate. Fuel, Oil, and gas are pricedat variable prices, similar to electricity and parking expense(Horngren, 1999).
The method is rational and just since it hasapplied a variable rate on cost centers that are measurable theability to ascertain usage enhances the billing of costs. Costcenters such as Fuel Oil/ gas, electricity / water, and cleaning areseparable costs consequently, and they should be shared depending onthe amount of space occupied. The method also identifies costs thatare inseparable such as the costs of the elevator, and charges themat market rates (Horngren, 1999).
The method serves as unfairto organizations that have large square footage but with littleconsumption of utilities such as electricity and water since therates are based on usage(Lawrence,1954).Besides, it is unfair tooffice holders that do not maximize the utility of IT services.Consequently, no matter the rate of access to IT services, thecharges shall be fixed.
Kindly evaluate the alternatives and get ready toshare your thoughts in a meeting on 23, November 2015. Please do nothesitate to contact me if you have any questions. [Amanda]
Horngren, C.(1982). Costaccounting: A managerial emphasis(5thed.). Englewood Cliffs, N.J.: Prentice-Hall.
Lawrence, W.(1954). Costaccounting (4thed.). New York: Prentice-Hall.
Horngren, C.(1999). Managementand cost accounting.London:Prentice Hall Europe.