Chapter 10, Problem 7P

### Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

Chapter
Section

### Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
236 views

# Self-Construction Olson Machine Company manufactures small and large milling machines. Selling prices of these machines range from $35,000 to$200,000. During the 5-month period from August 1, 2019, through December 31, 2019, Olson manufactured a milling machine for its own use. This machine was built as part of the regular production activities. The project required a large amount of time front planning and supervisory personnel, as well as that of some of the company’s officers, because it was a more sophisticated type of machine than the regular production models.  Throughout the 5-month period, Olson charged all costs directly associated with the construction of the machine to a special account entitled “Asset Construction Account.” An analysis of the charges to this account as of December 31, 2019, follows:Olson allocates factory overhead to normal production as a percent of direct labor dollars as follows:Olson uses a flat rate of 40% of direct labor dollars to allocate general and administrative overhead.  During the machine testing period, a cutter head malfunctioned and did extensive damage to the machine table and one cutter housing. This damage was not anticipated and was the result of an error in the assembly operation. Although no additional raw materials were needed to make the machine operational after the accident, the following labor for rework was required:Olson has included all these labor charges in the asset construction account. In addition, it included in the account the repairs and maintenance charges of $1,340 that it incurred as a result of the malfunction.Required: 1. Compute, consistent with GAAP and common practice, the amount that Olson should capitalize for the milling machine as of December 31, 2019, when it declares the machine operational. 2. Next Level Identify the costs you included in Requirement 1 for which there are acceptable alternative procedures. Describe the alternative procedure(s) in each case. 1. To determine Calculate the amount that Company O must capitalize for the milling machine as of December 31, 2019. Explanation Cost of self-constructed assets: Company sometimes constructs an item of “property, plant and equipment” which is used in the business operations and these are known as self-constructed assets. The cost of self-constructed assets comprises of expenses that are required to build an asset and put it in operating condition.  Particulars Amount ($) Amount ($) Raw materials: Iron castings 61,040 Other raw materials. 50,200$111,240 Direct labor: Layout (1) $450 Electricians (2) 2,700 Machinery (3) 7,200 Heat treatment (4) 750 Assembly (5) 2,450 Testing (6) 1,280 Additional testing labor (7) 800 15,630 Factory overhead: Layout and electricians (8)$2,205 Machining, heat treatment, assembly, testing (9) 12,480 14,685 Interest paid 4,260 Total amount to be capitalized 145,815

Table (1)

Working notes:

(1)Calculate the amount of direct labor costs for layout:

Directlaborcostsforlayout=Numberofhours×Costperunit=90hours×$5=$450

(2)Calculate the amount of direct labor costs for electricians:

Directlaborcostsforelectricians}=[(NumberofhoursNumberofdirectlaborhours)×Costperunit]=[(380hours80hours)×$9]=$2,700

(3)Calculate the amount of direct labor costs for machinery:

DirectlaborcostsforMachinery}=[(NumberofhoursNumberofdirectlaborhours)×Costperunit]=[(1,100hours200hours)×$8]=$7,200

(4)Calculate the amount of direct labor costs for Heat treatment:

DirectlaborcostsforHeattreatment}=Numberofhours×Costperunit=100hours×$7.50=$750

(5)Calculate the amount of direct labor costs for assembly:

2.

To determine

Ascertain the costs included in requirement 1 for which there are acceptable alternative procedures and explain the alternative procedures for each case.

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