Bakeman Co. decides to construct a piece of specialized machinery using personnel from the maintenance department. This is the first time the maintenance personnel have been used for this purpose, and the cost accountant for the factory is concerned as to the accounting for costs of the machine. Some of the issues raised by the maintenance department management follow:
(a) The maintenance department supervisor has instructed the workers to schedule work so that all the overtime hours are charged to the machinery. Overtime is paid at 150% of the regular rate, or at a 50% premium.
(b) Material used in the production of the machine is charged out from the materials storeroom at 125% of cost, the same markup used when material is furnished to subsidiary companies.
(c) The maintenance department overhead rate is applied on maintenance hours. No extra overhead is anticipated as a result of constructing the machine.
(d) Maintenance department personnel are not qualified to test the machine on the production line. This will be done by production employees.
(e) Although the machine will take about one year to build, no extra borrowing of funds will be necessary to finance its construction. The company does, however, have outstanding bonds from earlier financing.
(f) It is expected that the self-construction of the machinery will save the company at least $20,000.
What advice can you give the cost accountant to help in the determination of a proper cost for the machine? Address each individual issue.