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Hi Mike!
I need your help for a question in the KAPLAN kit.
During the year Llama manufactured an item of plant that it is using as part of its own
operating capacity. The details of its cost, which is included in cost of sales in the trial
balance, are:
$000
Materials cost 6,000
Direct labour cost 4,000
Machine time cost 8,000
Directly attributable overheads 6,000
The manufacture of the plant was completed on 31 March 2007 and the plant was
brought into immediate use, but its cost has not yet been capitalised.
All plant is depreciated at 12.5% per annum (time apportioned where relevant) using
the reducing balance method and charged to cost of sales.
The year end is 30 sep 2007.1. In the book all the costs have been included in cost of sales and then depreciated.
2. I am a bit confused here. Why it has been depreciated? All the costs have been included in the COS, then why it’s being depreciated?3. Could you explain why and the logic behind?
The question tells you that the $24,000 (6 + 4 + 8 + 6) has been included within cost of sales … and it should have been capitalised
I suggest that maybe you have seen 24,000 in the answer within the cost of sales working and assumed that it has been added there in the answer
In fact it should be deducted from the cost of sales given in the question
Now depreciate at 12.5% (Kaplan originally had this as 125%!) for half a year
12.5% = 1/8 and 1/8 x $24,000 = $3,000 for a full year
But we only want a half year = $1,500
So … deduct $24,000 from cost of sales and add into PPE
Then add the $1,500 depreciation into the cost of sales and deduct that amount from PPE
Does that satisfy you?
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