It is now July 2021 and the new production facility for hybrid mattresses became operational on 1 June 2021. Una Volk, Finance Manager, telephones you and says:

"Ben De Luca, Chief Executive Officer, has asked for an explanation of the fixed production overhead variances for the new production facility for June 2021. He has also queried the usefulness of these variances for controlling fixed production overhead. This is the first month that the new facility has been operational. There were some unforeseen costs associated with insuring and safety testing the building that occurred in June and there was a delay in employee training. It had been expected that the direct workforce would be made up of 10 new inexperienced employees and 15 experienced employees transferred from the main production facility. In reality, there were 20 new and 8 transferred employees. An additional supervisor was also appointed.

Ben has sent me two queries regarding some of the non-current assets in the new production facility.

Required:

Una provides you a schedule of information which you will see in the next two pages.

Using the information on the next two pages, prepare a briefing note for Ben which includes:

2. Answers to each of Ben's queries, which are included on the schedule I shall send you shortly, about non-current assets in the new production facility."

For Question 2

Non-current asset queries from Ben De Luca

1. "We have set up the new production facility in an old warehouse that we stopped using a year ago. Prior to deciding on the expansion, we had considered selling the building and it had been valued at E$100,000 on 30 June 2021. This IS significantly higher than its carrying amount of E$40,000 in our financial statements. I would like to include this value of E$100,000 in our financial statements for the year to 30 June 2021. I also think that we should do this for the rest of the buildings that we own where the revalued amount is higher than the carrying amount.

Please let me know whether this is possible, and how revaluing our buildings will affect our financial statements for the year to 30 June 2021 and reported a profit in the following year.

2. We have spent E$950,000 on the new automated digital production line. The supplier has informed us that the production line will have a useful life of 20 years, although I know that Gavin is skeptical of this and believes that it will need to be replaced in 15 years. My view is that we should depreciate over 20 years because this will spread the cost of the new line over more years.

Please could you explain to me how many years we should depreciate this asset over and if we choose to depreciate over 15 years, could we in the future change its useful life to 20 years if we discovered that the supplier's assessment was accurate? I'd also like to know how any change in useful life would be dealt with in the financial statements."

Answer rating: 100% (QA)

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