Question

Worf Co. both purchases and constructs various equipment it uses in its operations. The following items for two different types of equipment were recorded in random order during the calendar year 2014.

Purchase
Cash paid for equipment, including sales tax of $17,485		$367,185
Freight and insurance cost while in transit		6,994
Cost of moving equipment into place at factory		10,841
Wage cost for technicians to test equipment		13,988
Insurance premium paid during first year of operation on this equipment		5,246
Special plumbing fixtures required for new equipment		27,976
Repair cost incurred in first year of operations related to this equipment		4,546
Construction
Material and purchased parts (gross cost $699,400; failed to take 1% cash discount)		$699,400
Imputed interest on funds used during construction (stock financing)		48,958
Labor costs		664,430
Allocated overhead costs (fixed-$69,940; variable-$104,910)		174,850
Profit on self-construction		104,910
Cost of installing equipment		15,387

Compute the total cost for each of these two pieces of equipment.

Purchase equipment

$'

Answer 1

Concepts and reason

Purchase or Acquisition Costs: It is the cost of acquisition the company recognises in the books for the value of its assets like property, equipment after making suitable adjustments for discounts, closing costs and other expenditure in related to it.

Self-constructed assets: It refers to the assets which are built by the assets which appear in the balance sheet of the company. The cost of the self-constructed asset includes cost of materials and cost of labor (Direct cost) and other indirect cost associated with the construction.

Fundamentals

Acquisition or Purchase of equipment: It includes all costs and expenses incurred in the purchase of equipment and cost incurred in preparing it for use. The costs include purchase price, freight and handling charges, insurance on equipment, Cost of special foundations, assembling and installation costs.

Direct costs: They are the costs which are identifiable and traced to a particular asset. For example: The material cost which is used to create a particular product is a direct cost. The supplies which are used to manufacture a product are also considered as direct cost. The direct costs are related to material, labor and expenses which are directly attributable to a particular asset.

Indirect costs:They are the costs which are not directly related to a particular asset. They are the costs which are normally referred to as overhead expenses. The indirect cost is applied on basis on direct cost. For example: labor hours of employees involved in the construction of asset.

(1)

The total purchase cost of equipment is calculated as follows:

Therefore,total purchase cost pieces of equipment are $426,984.

(2)

The total cost of construction price of equipment is calculated as follows:

Therefore, total cost of construction piece of equipment is $1,547,073.

Working notes:

Calculation of cost of material and purchased parts is as follows:

$\begin{array}{c}\\{\rm{Material and purchased parts = Gross cost -- Cash discount on gross cost}}\\\\{\rm{ = \$ 699,400 -- }}\left( {{\rm{1\% of \$ 699,400}}} \right)\\\\ = \,\,\$ 699,400\,\,--\,\$ 6,994\\\\ = {\rm{\$ 692,406}}\\\end{array}$

Calculation of overhead costs is as follows:

$\begin{array}{c}\\{\rm{Overhead costs = Fixed overhead cost + Variable overhead cost}}\\\\{\rm{ = \$ 69,940 + \$ 104,910}}\\\\{\rm{ = \$ 174,850}}\\\end{array}$

Ans: Part 1

The total cost of pieces of equipment purchased is $426,984.

Part 2

The total cost of construction piece of equipment is $1,547,073.