Self-Construction

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, 2016, through December 31, 2016, 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, 2016, follows:

ASSET CONSTRUCTION ACCOUNT
Item Description	Cost
Raw Materials
Iron castings:
Main housing, 3 sections	$37,480
Movable heads, 2 heads @ $3,900	7,800
Machine bed	4,760
Table, 2 sections @ $5,500	11,000		$61,040
Other raw materials:
Electrical components and wiring	$28,000
Worm screws and housing	8,600
Cutter housings	2,700
Conveyor system	8,400
Other parts	2,500		50,200
Direct Labor Costs
Layout 90 hrs. @ $5.00	$450
Electricians 380 hrs. @ $9.00	3,420
Machining 1,100 hrs. @ $8.00	8,800
Heat treatment 100 hrs. @ $7.50	750
Assembly 450 hrs. @ $7.00	3,150
Testing 180 hrs. @ $8.00	1,440		18,010
Other Direct Charges
Repairs and maintenance during testing period	$ 1,340
Avoidable interest expense from 8/1/16 to 12/31/16	4,260
Additional labor to assist during machine testing period, 180 hrs. @ $5.00	900		6,500
Balance, December 31, 2016			$135,750

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)
Departments	Variable	Fixed	Total
Layout and electricians	50%	20%	70%
Machining,* heat treatment, and assembly	50%	50%	100%

*All testing is conducted by employees in the machining department.

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.