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:

The company allocates factory overhead to normal production as a percent of direct labor dollars as follows:

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 eachcase.

Transcribed Image Text:

ASSET CONSTRUCTION ACCOUNT Item Description Raw Materials Iron castings Cost Main housing, 3 sections Movable heads, 2 heads $3,900 Machine bed $37.480 7,800 4,760 1,000 Table, 2 sections @ $5,500 Other raw materials: 61,040 Electrical components and wiring $28,000 8,600 2,700 8,400 2,500 Worm screws and housing Cutter housings Conveyor system Other parts Direct Labor Costs Layout 90 hr. s5.00 Electricians 380 hr. 9.00 Machining 1,100 hr. 8.00 Heat treatment 100 hr@ 7.50 Assembly 450 h 7.00 Testing 180 hr. 8.00 50,200 S 450 3,420 8,800 750 3,150 1,440 18,010 Other Direct Charges Repairs and maintenance during testing period Interest expense from 8/1/07 to 12/31/07 on funds borrowed for 1,340 construction purposes Additional labor to assist during machine testing period, 180 hr. Balance December 31, 2007 4,260 900 $5.00 6,500 $135,750 Factory Overhead Rates applied as a percent Fixed 20% 50% of direct labor dollars Departments Layout and electricians Machining heat treatment, and assembly All testing is conducted by employees in the machining department Variable 50% 50% Total 70% 100% aL