Jay Manufacturing, Inc., began operations five years ago producing probos, a new medical instrument it hoped to sell to doctors and hospitals. The demand for probos far exceeded initial expectations, and the company was unable to produce enough probos to meet demand. The company was manufacturing this product using self-constructed equipment at the start of operations. To meet demand, it needed more efficient equipment. The company decided to design and self-construct this new, more efficient equipment. A section of the plant was devoted to development of the new equipment and a special staff was hired. Within six months, a machine was developed at a cost of $170,000 that successfully increased production and reduced labor costs substantially. Sparked by the success of this new machine, the company built three more machines of the same type at a cost of $80,000 each.

a. In addition to satisfying a need that outsiders could not meet within the desired time, why might a company self-construct fixed assets for its own use?
b. Generally, what costs should a company capitalize for a self-constructed fixed asset?
c. Discuss the propriety of including in the capitalized cost of self-constructed assets:
(1) The increase in overhead caused by the self-construction of fixed assets.
(2) A proportionate share of overhead on the same basis as that applied to goods manufactured for sale.
d. Discuss the accounting treatment for the $90,000 amount ($170,000 – $80,000) by which the cost of the first machine exceeded the cost of subsequent machines.
(AICPA Adapted)

  • CreatedJanuary 22, 2015
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