The ABC, a computer manufacturing organization, is using building “ALFA–I” as ma

Question

The ABC, a computer manufacturing organization, is using building “ALFA–I” as manufacturing department while building “ALFA–II” for its administrative work. As a “Manager Accounts”, you are required to advice to the Accountant of the organization with logical reason regarding the treatment of depreciation of the building “ALFA–I” as direct or indirect manufacturing expense.

Also explain to him that in which heads of the “Income Statement” the depreciation of “ALFA-1” and “ALFA–II” will be reported.

Explanation / Answer

All those expenses which relate to the manufacturing of the goods are treated as manufacturing expenses. All those expenses which relate to the administration of the firm are treated as the administration expenses. As above mentioned that there are two departments A MANUFACTURING and B ADMINISTRATION. The expenses of each department will be treated in their books of account. Now the question is whether the depreciation of the building of A is direct or indirect expense. So my answer is that the depreciation of building is indirect expenses of the manufacturing department. The treatment of the depreciation will be written in the head of the administration expenses of the manufacturing department. Logical reason behind the treatment of the depreciation of the building is that it is not written in the head of factory overheads because it is not the part of manufacturing cost. It is just the charge of the use of the building. If there was the depreciation of the plant and machinery then it was charged as the direct expense. While the depreciation of the building of the administration department will be charged in the head of the administration expense in the income statement and it is the direct expense for the administration department. Because for the administration work of the company they need the building for the administration department. Go to this link: http://vchowk.com/ and see what documents this guy has uploaded for you to see to answer your questions. Please Rate and Good Luck

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