Brazilia Corporation needed a warehouse and maintenance facility on its company site, which already housed three manufacturing/ storage facilities and the company head office. The lowest outside bid for the facility was $ 6,400,000. Brazilia believed that it could successfully construct the facility and have more control over the construction process. Accordingly, it began construction on company- owned land in 20X5. The facility was completed in 20X6. Costs related to the project have been accumulated in one account, “manufacturing facility”:
Materials......................... $ 2,132,400
Subcontracted work ( primarily electrical and plumbing) ....... 691,800
Direct labour; plant workers assigned to construction tasks ....... 911,600
Direct labour; construction workers hired specifically for this project ....247,200
Plant foreman used for construction supervision; salary and benefits ..... 69,800
Direct labour; plant maintenance workers assigned to construction tasks. 106,400
Engineering and architectural services ............... 433,400
a. Overhead is assigned in the plant to cover supplies used, electricity, occupation costs, maintenance, and so on in the production environment at a rate of $ 0.57 for every dollar of direct plant labour. This is reasonable for the warehouse project.
b. A loan was negotiated to cover the cash low needed for construction. Interest of $ 151,800 was paid on this loan.
c. Of the $ 911,600 of plant workers’ time assigned to construction tasks, 70%, or $ 638,120, relates to time that would otherwise have been idle.
d. T he administrative office handled the planning and paperwork related to the construction. The staff worked full- time on this for approximately six months, representing salary and benefit costs of $ 114,000.
e. he executive team ( chief executive officer and chief financial officer of the company, primarily) devoted approximately 10% of their time to this project during construction. The compensation package for these two individuals was $ 640,000 for this period.
1. Prepare a schedule showing the costs that can be capitalized for the building. If any items are not capitalized, explain why not.
2. What, if anything, would change in your answer if the outside bid on this project had been $ 4,800,000? Explain.
3. Under what circumstances can loan interest be capitalized as part of the cost of self- constructed assets? Explain.