Cost Management 6th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 10

Allocation of Administrative Costs Wical Rental Management Services manages four apartment buildings, each with a different owner. Wical's top management has observed that the apartment buildings with more expensive rental rates tend to require more of her time and also the time of her staff. The four apartment buildings incur a total annual operating expense of $7,345,733, and these operating expenses are traced directly to the apartment buildings for the purpose of determining the profit earned by the building owners. The annual management fee that Wical earns is based on a percentage of total annual operating expenses and is negotiated each year. For the current year the fee rate is 6%, and Wical has the following information for current year average rental rates and occupancy rates.

Required
1. For the current year, Wical must choose between the number of units in each complex, the average occupancy, or the total annual rental revenue in each complex to allocate the management fee. Explain your choice of method and show how much of the management fee would be allocated to each apartment building using your method.
2. What ethical issues, if any, are involved in the choice of method in requirement 1