P10-7 Self-Construction Olson Machine Company manufactures small and large milling machines. Selling prices of these machines range from $35,000 to $200,000. During the 5-month period from August 1, 2019, through December 31, 2019, Olson 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 person-nel, 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 5-month period, Olson 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, 2019, follows: Factory Overhead Rates (applied as a percent of direct labor dollars)VariableFixedTotalDepartmentsLayout and electriciansMachining, * heat treatment, and assembly* All testing is conducted by employees in the machining department.50%50%20%50%70%100%Olson 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 machinetable and one cutter housing. This damage was not anticipated and was the result of an error in the assembly oper-ation. Although no additional raw materials were needed to make the machine operational after the accident, thefollowing labor for rework was required:Direct Labor HoursElectric80MachiningAssemblyTesting (conducted by machining department)Olson has included all these labor charges in the asset construction account. In addition, it included in the accountthe repairs and maintenance charges of $1,340 that it incurred as a result of the malfunction.20010020Required:1. Compute, consistent with GAAP and common practice, the amount that Olson should capitalize for the mill-ing machine as of December 31, 2019, when it declares the machine operational.2. Next Level Identify the costs you included in Requirement 1 for which there are acceptable alternative proce-dures. Describe the alternative procedure(s) in each case. ASSET CONSTRUCTION ACCOUNTItem DescriptionCostRaw MaterialsIron castings:Main housing, 3 sectionsMovable heads, 2 heads @ $3,900Machine bedTable, 2 sections @ $5,500Other raw materials:$37,4807,8004,76011,000$ 61,040Electrical components and wiringWorm screws and housingCutter housingsConveyor systemOther parts$28,0008,6002,7008,4002,50050,200Direct Labor CostsLayout 90 hrs. @ $5.00Electricians 380 hrs. @ $9.00Machining 1,100 hrs. @ $8.00Heat treatment 100 hrs. @ $7.50Assembly 450 hrs. @ $7.00Testing 180 hrs. @ $8.00Other Direct ChargesRepairs and maintenance during testing periodAvoidable interest expense from 8/1/19 to 12/31/19Additional labor to assist during machine testing period, 180 hrs. @ $5.00Balance, December 31, 20192$3,4208,8007504503,1501,44018,010$ 1,3404,2606,500$135,750900Olson allocates factory overhead to normal production as a percent of direct labor dollars as follows:

Answer 1) Prepare a schedule to compute the total costs to be capitalized Raw Materials…

Answered: chines range from $35,000 to $200,000.…

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P10-7 Self-Construction Olson Machine Company manufactures small and large milling machines. Selling prices of these machines range from $35,000 to $200,000. During the 5-month period from August 1, 2019, through December 31, 2019, Olson 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 person-nel, 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 5-month period, Olson 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, 2019, follows:

Factory Overhead Rates (applied as a percent of direct labor dollars)
Variable
Fixed
Total
Departments
Layout and electricians
Machining, * heat treatment, and assembly
* All testing is conducted by employees in the machining department.
50%
50%
20%
50%
70%
100%
Olson 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 oper-
ation. 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
Assembly
Testing (conducted by machining department)
Olson 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.
200
100
20
Required:
1. Compute, consistent with GAAP and common practice, the amount that Olson should capitalize for the mill-
ing machine as of December 31, 2019, when it declares the machine operational.
2. Next Level Identify the costs you included in Requirement 1 for which there are acceptable alternative proce-
dures. Describe the alternative procedure(s) in each case.

ASSET CONSTRUCTION ACCOUNT
Item Description
Cost
Raw Materials
Iron castings:
Main housing, 3 sections
Movable heads, 2 heads @ $3,900
Machine bed
Table, 2 sections @ $5,500
Other raw materials:
$37,480
7,800
4,760
11,000
$ 61,040
Electrical components and wiring
Worm screws and housing
Cutter housings
Conveyor system
Other parts
$28,000
8,600
2,700
8,400
2,500
50,200
Direct Labor Costs
Layout 90 hrs. @ $5.00
Electricians 380 hrs. @ $9.00
Machining 1,100 hrs. @ $8.00
Heat treatment 100 hrs. @ $7.50
Assembly 450 hrs. @ $7.00
Testing 180 hrs. @ $8.00
Other Direct Charges
Repairs and maintenance during testing period
Avoidable interest expense from 8/1/19 to 12/31/19
Additional labor to assist during machine testing period, 180 hrs. @ $5.00
Balance, December 31, 2019
2$
3,420
8,800
750
450
3,150
1,440
18,010
$ 1,340
4,260
6,500
$135,750
900
Olson allocates factory overhead to normal production as a percent of direct labor dollars as follows:

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