Thai manufacturing Inc. began operations five years ago producing a new diagnostic instrument, it hoped to sell to doctors, dentists, and hospitals. The demand for the instrument far exceeded initial expectations, and the company was unable to produce enough of the instrument to meet the demand. Thai was manufacturing the instrument using equipment it built at the start of the operations, but it needed more efficient equipment to meet demand. Company management decided to design and build the equipment, because no equipment currently available on the market was suitable for producing the instrument. In 2018, a section of the plant was devoted to development of the new equipment and a special staff of personnel was hired. Within six months, a machine was developed at a cost of $170,000 that increased production and reduced labour cost substantially. Sparked by the success of the new machine, the company built three more machines of the same type at a cost of $80,000 each. Required: 1) In addition to satisfying a need that outsiders cannot meet within the desired time, what other reasons might cause a firm to construct fixed assets for its own use? Explain each reason. 2) In general, what costs should be capitalized for a self-construct asset? Explain the rationale for each cost. 3) Discuss the appropriateness (give pros and cons) of including these charges in the capitalized cost of self-constructed assets: a) The increase in overhead caused by the self -constructed of fixed assets b) A proportionate share of overhead on the same basis as that applied to goods manufactured for sale (consider whether the company is at full capacity) 4) Discuss the proper accounting treatment of the $90,000 ($170,000 - $80,000) by which the cost of the first machine exceeded the cost of the subsequent machines.
Thai manufacturing Inc. began operations five years ago producing a new diagnostic instrument, it hoped to sell to doctors, dentists, and hospitals. The demand for the instrument far exceeded initial expectations, and the company was unable to produce enough of the instrument to meet the demand. Thai was manufacturing the instrument using equipment it
built at the start of the operations, but it needed more efficient equipment to meet demand.
Company management decided to design and build the equipment, because no equipment currently available on the market was suitable for producing the instrument.
In 2018, a section of the plant was devoted to development of the new equipment and a special staff of personnel was hired. Within six months, a machine was developed at a cost of $170,000 that increased production and reduced labour cost substantially. Sparked by the success of the
new machine, the company built three more machines of the same type at a cost of $80,000 each.
Required:
1) In addition to satisfying a need that outsiders cannot meet within the desired time, what other reasons might cause a firm to construct fixed assets for its own use? Explain each reason.
2) In general, what costs should be capitalized for a self-construct asset? Explain the rationale for each cost.
3) Discuss the appropriateness (give pros and cons) of including these charges in the capitalized cost of self-constructed assets:
a) The increase in
assets
b) A proportionate share of overhead on the same basis as that applied
to goods manufactured for sale (consider whether the company is at
full capacity)
4) Discuss the proper accounting treatment of the $90,000 ($170,000 - $80,000) by which the cost of the first machine exceeded the cost of the subsequent machines.
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