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Hi Chris,
Hope you are well!
Below is the question:
An entity started construction on a building for its own use on 1 April
20X7 and incurred the following costs:
$000
Purchase price of land 250,000
Stamp duty 5,000
Legal fees 10,000
Site preparation and clearance 18,000
Materials 100,000
Labour (period 1 April 20X7 to 1 July 20X8) 150,000
Architect’s fees 20,000
General overheads 30,000
–––––––
583,000
–––––––
The following information is also relevant:
• Material costs were greater than anticipated. On investigation, it was
found that materials costing $10 million had been spoiled and
therefore wasted and a further $15 million was incurred on materials
as a result of faulty design work.
• As a result of these problems, work on the building ceased for a
fortnight during October 20X7 and it is estimated that approximately
$9 million of the labour costs relate to this period.
• The building was completed on 1 July 20X8 and occupied on 1
September 20X8.My question – For materials how did they know the exact distribution that 75m will be inckuded and 25m to be excluded ?
and what is to be donw with 115 m amount ?Hi,
In the first bullet point we are told about $10 million of spoiled materials and $15 million spent that was due to a faulty design. Neither of these can be capitalised, and they total the $25 million that is excluded from the cost.
The treatment of the $115 million amount depends on what it relates to and I cannot immediately see what it does relate to or where it comes from. If you could let me know then I could help further.
Thanks
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