MGT101 GDB Spring 2012 solution

United Manufacturing Company (UMC) has recently imported new machinery – MZ01 on 1st June, 2011. The invoice price of this machinery is Rs. 800,000/-. UMC has paid Rs. 50,000/- as custom duty and freight charges. After reaching the machinery at factory, a sum of Rs. 10,000/- was spent as installation and erection cost. Besides this, an amount of Rs. 100,000/- has also been incurred for training the machine staff to operate this machinery. During the installation, an internal part of the machinery got damaged and a new part was replaced with an amount of Rs. 9,000/-.

Required:
You are required to identify along with proper reasons that which of the costs of the above mentioned transactions would be charged to the machinery account and which be not.

Note: Your comments should be according to requirement and not be more than 100 words.

Solution:

All the cost will first go to “Capital Expenditure” As UMC has brought machinery for its business use and based on the information all of us know that (CE) a balance sheet account with following information .therefore all the cost will first go to “Capital

Expenditure”. (CE) contain the following information

Installing, training, or any other cost to get fixed asset ready to use. Legal, custom, carriage inward cost for buying machinery Acquiring asset cost or improvement is made to existing  This account not only has cost of purchasing a fixed asset, but also includes other costs necessary to get the asset operational. Once machinery is in ready to use all CE moves to “Fixed Asset” account and ready to be depreciated.

Idea Solution 2:

Invoice Price
Add Freight and installation
Add Cost incurred at installation
Add Cost incurred damaged part installation

Training cost (not be added )

Machine Cost
Invoice Price(800,000)+ Custom duty and freight charges (50,000) + Installation and erection cost (10,000) + New part was replaced (9,000) Total Cost: 869,000

Discussion

Custom duty and freight charges is a part of direct cost because its incurred for the usage of machine that is necessary for machine reach factory.

Installation and erection cost always considered direct cost that is included the asset cost because without installation machine cannot worked.

New part replaced due to damage its considered direct cost because the machine not starting the work.

Training cost its relate to other cost head not added in machine cost even its also for usage of machine but we only added those expenses into machine cost that is necessary for running the machine.

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