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Cost type CU
Concept design 2,500
Evaluation of design alternatives 3,700
Determination of required technology 8,100
Final selection of alternatives 1,400
Software design 28,000
Software coding 42,000
Quality assurance testing 30,000
Data conversion costs 3,900
Training 14,000
Overhead allocation 6,900
General and administrative costs 11,200
Ongoing maintenance costs 6,000
Totals 157,700
The Hy-Tech management then authorizes the development of an additional module(C) that allows
employees to enter time data into the system from their cell phones using text messaging. Despite
successfully passing through the concept design stage, the development team cannot resolve
interface problems on a timely basis. Management elects to shut down the development project.
CU13,000 of programming and testing costs already incurred for the project.
Discuss the accounting treatment and recognition method of various cost incurred by Hy-Tech.
Response:
Let us segregate those costs of main project which can be capitalised.
Cost type Charged to expense (CU) Capitalized(CU)
Concept design 2,500
Evaluation of design alternatives 3,700
Determination of required technology 8,100
Final selection of alternatives 1,400
Software design 28,000
Software coding 42,000
Quality assurance testing 30,000
Data conversion costs 3,900
Training 14,000
Overhead allocation 6,900
General and administrative costs 11,200
Ongoing maintenance costs 6,000
Totals CU57,700 CU100,000
Thus, the total capitalized cost of this development project is CU100,000. The estimated useful life
of the timekeeping system is five years. As soon as all testing is completed, Hy-Tech’s controller
should begin amortizing using a monthly charge of €1,666.67. The calculation is as follows:
CU100,000 capitalized cost ÷ 60 months = CU1,666.67 amortization charge
For Module B The full CU22,438 amount of these costs can be capitalized. By the time this module
is completed, the original system has been in operation for one year, thereby reducing the
amortization period for the new module to four years. The calculation of the monthly straight-line
amortization follows:
CU22,438 capitalized cost ÷ 48 months = CU467.46 amortization charge
For Module C all of the CU13,000 of programming and testing costs to be expensed in the current
period.