Case9-4 Self-constructed asset (page 295)

Due to growing demand of a new product, Jay Manufacturing, Inc. needs to expand its product line but cannot find an outside supplier for the expansion so decides to design and build the equipment. In 2017, a section of the plant was devoted to development of the new equipment and a special staff of personnel was hired. Within six months, a machine was developed at a cost of $170,000 that increased production and reduced labor cost substantially. Sparked by the success of the new machine, the company built three more machines of the same type at a cost of $80,000 each.

Required:

1. In general, what costs should be capitalized for a self-constructed asset?
2. Discuss pros and cons of including these charges in the capitalized cost of self-constructed assets:
   1. The increase in overhead caused by the self-construction of fixed assets
   2. A proportionate share of overhead on the same basis as that applied to goods manufactured for sale (consider whether the company is at full capacity)
3. Discuss the proper accounting treatment of the $90,000 ($170,000 - $80,000) by which the cost of the first machine exceeded the cost of the subsequent machines.