Olson Machine Company manufactures small and large milling machines. Selling prices of these machines range from $35,000 to $200,000. During the 5-month period from August 1, 2019, through December 31, 2019, Olson manufactured a milling machine for its own use. This machine was built as part of the regular production activities. The project required a large amount of time from planning and supervisory personnel, as well as that of some of the company’s officers, because it was a more sophisticated type of machine than the regular production models.
Throughout the 5-month period, Olson charged all costs directly associated with the construction of the machine to a special account entitled “Asset Construction Account.” An analysis of the charges to this account as of December 31, 2019, follows:

Olson uses a flat rate of 40% of direct labor dollars to allocate general and administrative overhead.
During the machine testing period, a cutter head malfunctioned and did extensive damage to the machine table and one cutter housing. This damage was not anticipated and was the result of an error in the assembly operation.
Although no additional raw materials were needed to make the machine operational after the accident, the following labor for rework was required:

...............................................................................Direct Labor Hours
Electric .................................................................................80
Machining ........................................................................200
Assembly .........................................................................100
Testing (conducted by machining department) ..........20
Olson has included all these labor charges in the asset construction account. In addition, it included in the account the repairs and maintenance charges of $1,340 that it incurred as a result of the malfunction.

Required:
1. Compute, consistent with GAAP and common practice, the amount that Olson should capitalize for the milling machine as of December 31, 2019, when it declares the machine operational.
2. Next Level Identify the costs you included in Requirement 1 for which there are acceptable alternative procedures. Describe the alternative procedure(s) in each case.

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ASSET CONSTRUCTION ACCOUNT Item Description Cost Raw Materials Iron castings: Main housing, 3 sections Movable heads, 2 heads @ $3,900 Machine bed $37,480 7,800 4,760 11,000 $ 61,040 Table, 2 sections @ $5,500 Other raw materials: Electrical components and wiring Worm screws and housing Cutter housings Conveyor system Other parts $28,000 8,600 2,700 8,400 2,500 50,200 Direct Labor Costs Layout 90 hrs. @ $5.00 Electricians 380 hrs. @ $9.00 Machining 1,10O0 hrs. @ $8.00 Heat treatment 100 hrs. @ $7.50 Assembly 450 hrs. @ $7.00 Testing 180 hrs. @ $8.00 450 3,420 8,800 750 3,150 1,440 18,010 Other Direct Charges Repairs and maintenance during testing period Avoidable interest expense from 8/1/19 to 12/31/19 Additional labor to assist during machine testing period, 180 hrs. @ $5.00 Balance, December 31, 2019 $ 1,340 4,260 6,500 $135,750 900 Olson allocates factory overhead to normal production as a percent of direct labor dollars as follows: Factory Overhead Rates (applied as a percent of direct labor dollars) Variable Fixed Total Departments Layout and electricians Machining, * heat treatment, and assembly *All testing is conducted by employees in the machining department. 50% 20% 70% 50% 50% 100%