Self Construction The Olson Machine Company manufactures small and large milling machines. Selling prices of these machines range from $35,000 to $200,000. During the five month period from August 1, 2007 through December 31, 2007, the company 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 from 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 five month period, the company 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, 2007 follows:
|
ASSET CONSTRUCTION ACCOUNT |
||
|
Item Description |
Cost |
|
|
Raw Materials |
||
|
Iron castings: |
||
|
Main housing, 3 sections |
$37,480 |
|
|
Movable heads, 2 heads @ $3,900 |
7,800 |
|
|
Machine bed |
4,760 |
|
|
Table, 2 sections @ $5,500 |
11,000 |
$61,040 |
|
Other raw materials: |
||
|
Electrical components and wiring |
$28,000 |
|
|
Worm screws and housing |
8,600 |
|
|
Cutter housings |
2,700 |
|
|
Conveyor system |
8,400 |
|
|
Other parts |
2,500 |
50,200 |
|
Direct Labor Costs |
||
|
Layout 90 hr. @ $5.00 |
$450 |
|
|
Electricians 380 hr. @ 9.00 |
3,420 |
|
|
Machining 1,100 hr. @ 8.00 |
8,800 |
|
|
Heat treatment 100 hr. @ 7.50 |
750 |
|
|
Assembly 450 hr. @ 7.00 |
3,150 |
|
|
Testing 180 hr. @ 8.00 |
1,440 |
18,010 |
|
Other Direct Charges |
||
|
Repairs and maintenance during testing period |
$1,340 |
|
|
Interest expense from 8/1/07 to 12/31/07 on funds borrowed for |
||
|
construction purposes |
4,260 |
|
|
Additional labor to assist during machine testing period, 180 hr. @ $5.00 |
900 |
6,500 |
|
Balance, December 31, 2007 |
$135,750 |
The company allocates factory overhead to normal production as a percent of direct labor dollars as follows:
|
Departments |
Variable |
Factory Overhead Rates (applied as a percent of direct labor dollars) Fixed |
Total |
|
Layout and electricians |
50% |
20% |
70% |
|
Machining,* heat treatment, and assembly |
50% |
50% |
100% |
The company 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:
|
Direct Labor Hours |
|
|
Electric |
80 |
|
Machining |
200 |
|
Assembly |
100 |
|
Testing (conducted by machining department) |
20 |
The company 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, in accordance with generally accepted accounting principles, the amount that Olson Machine Company should capitalize for the milling machine as of December 31, 2007 when it declares the machine operational.
2. Identify the costs you included in Requirement 1 for which there are acceptable alternative procedures. Describe the alternative procedure(s) in each case.