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, 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: Cost ASSET CONSTRUCTION ACCOUNT Item Description Raw Materials Iron castings: Main housing, 3 sections Movable heads, 2 heads @ $3,900 Machine bed Table, 2 sections $5,500 Other raw materials: $37,480 7,800 4,760 11,000 $61,040 $28,000 8,600 Electrical components and wiring Worm screws and housing Cutter housings Conveyor system 2,700 8,400 2,500 50,200 Other parts Direct Labor Costs Layout 90 hrs. @ $5.00 $450 3,420 8,800 750 3,150 1,440 18,010 Electricians 380 hrs. @ 59.00 Machining 1,100 hrs. @ $8.00 Heat treatment 100 hrs. @ $7.50 Assembly 450 hrs. @ $7.00 Testing 180 hrs. @ $8.00 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 4,260 900 6,500 $135,750 Olson allocates factory overhead to normal production as a percent direct labor dollars as follows: Factory Overhead Rates (applied as a percent of direct labor dollars) Variable Fixed 50% 20% 70% Departments Layout and electricians Machining,* heat treatment, and assembly Total 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 80 200 Machining Assembly Testing (conducted by machining department) 100 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. Raw materials to be capitalized: Direct labor to be capitalized: Factory Overhead to be capitalized: Other costs to be capitalized: Total costs to be capitalized: Variable and traceable fixed overhead costs incurred to build the asset should be capitalized because 2. Next Level Rework costs arising from errors that ought not to have occurred should be the costs