Question

) Large Mart is currently using its own engineers and equipment to build the machinery for a new factory in Armidale in which tablet computers will be produced. Last week, the director of Large Mart’s engineering department (who usually works in Sydney) travelled (by car) from Sydney to Brisbane to attend a conference. On his way to the conference he stopped in Armidale to visit the team that is building the machinery for the new factory. During his visit to Armidale he completed a tour of the construction side and gave an interview to the local newspaper about the factory’s future benefits to the Armidale economy. The director of Large Mart’s engineering department has contacted the CFO to request that the expenditure associated with his trip between Sydney and Armidale should be included in the cost of the new machinery (he argues the expenditure should be capitalised) because he believes that the cost of the his trip are directly attributable to the construction of the factory. The CFO is not sure if the travel expenditure of the director of Large Mart’s engineering department can be capitalised and has asked you to research the following points. a) Provide a detailed outline of the requirements that must be fulfilled before any expenditure associated with the machinery for the new factory can be capitalised. b) Discuss whether or not the travel costs that the director of Large Mart’s engineering department incurred for his trip between Sydney and Armidale meet the requirements that you have identified in part a of this question.

Answer 1

Answer a. There are many costs may incurred on a capital assets/ Machinery during his useful economic life. Initially this cost will be purchases cost, carriage expenses, duty and taxes, other direct costs related to capital assets and during life these expenses may be interest or other borrowing costs, regular maintenances, repair cost, other operating costs etc . Following may be directly attributable costs:-

•             Site preparation

•             Initial delivery and handling costs

•             Installation cost

•             Professional fees like fees of architects and engineers

•             All other costs which are directly relate to asset

Note: - General administrative and other general overheads costs should not be included in capital asset.

As per IAS 16.7 Any expenditure should be capitalize to a capital assets/ Machinery if following conditions fulfills:-

(a)          It is probable that the future economic benefits associated with the asset will flow to the organization.

(b)          The cost of the asset can be measured reliably but cost may be direct or indirect.

(c)           These costs may be incurred at the time of purchase, construction, or subsequently to add to, replace part of, or service it.

Answer(b) Travel cost that the director of Large Mart’s engineering department incurred for his trip between Sydney and Armidale, does not meet the requirements of principles, because-

1.            Initial travel purpose was not to inspection of the machinery for the new factory. Hence travel is not direct or indirectly related to machinery.

2.            This is a general administrative nature cost which should not be included in cost of capital asset.

3.            The travel cost also not fulfilling any of above conditions and not include in list of directly attributable costs of Answer (a) given.

So this travel cost should not be allocated to machinery cost.