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As-10

Giridhar S Karandikar (Team Lead) (7543 Points)

24 May 2012

In AS-10 Accounting for Fixed Assets, there is an paragraph as given below:

The expenditure incurred on start-up and commissioning of the project,including the expenditure incurred on test runs and experimental production,is usually capitalised as an indirect element of the construction cost.

What does the term 'Indirect Element' of cost means. We add all the costs incidental to the asset for bringing to to its presenet location & condition whether direct or indirect. then why the word 'Indirect Element' is being used.

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2 Replies

Roshan Thomas (C.E.O ) (356 Points)
Replied 24 May 2012

I give below my opinion

This is probably because such cost is incurred after the installation is complete. Test runs and experimental productions are done to calibrate the machinery and to snychronize the production process.

So it is not a direct element for bringing the asset to present condition. It is incurred after bringing and installing it at its present location.

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shivam gupta (Student) (142 Points)
Replied 24 May 2012

Bringing to present location means freight & all other expenses paid to bring the asset in premises i.e present location.

Condition means to make the machinery ready to use.

so as AS says all the cost incurrerd to bring the machine to its present location and condition.

such cost incurred after installation that means the the condition of bringing the Machinery to present condition has completed but machiney still not in condition i.e ready to use

so in order to bring the machinery in use, we have to check its capability so we do test runs of machinery which is an indirect cost to bring the machinery in present condition. that is why it is to be capitalised

& Direct element means the cost which we can easily identify to a particular Machinery like freight , but test run is an expenditure which usually does after installation but it is an indirect cost to bring the machinery in present condition .