Question

(Contract Costs) Rex’s Reclaimers entered into a contract with Dan’s Demolition to manage the processing of recycled materials on Dan’s various demolition projects. Services for the 3-year contract include collecting, sorting, and transporting reclaimed materials to recycling centers or contractors who will reuse them. Rex’s incurs selling commission costs of \(2,000 to obtain the contract. Before performing the services, Rex’s also designs and builds receptacles and loading equipment that interfaces with Dan’s demolition equipment at a cost of \)27,000. These receptacles and equipment are retained by Rex’s and can be used for other projects. Dan’s promises to pay a fixed fee of \(12,000 per year, payable every 6 months for the services under the contract. Rex’s incurs the following costs: design services for the receptacles to interface with Dan’s equipment \)3,000, loading equipment controllers \(6,000, and special testing and OSHA inspection fees \)2,000 (some of Dan’s projects are on government property).

Instructions

(b) Dan’s also expects to incur general and administrative costs related to this contract, as well as costs of wasted materials and labor that likely cannot be factored into the contract price. Can these costs be capitalized? Explain.

Short answer

Contract cost cannot include in the total capital cost as it is an operational cost of the organization.

Step-by-step solution

Meaning of Contract Cost

Contract Costs refer to the expected costs of extending, converting, or changing a service. Any extra capacity shall not contain or be determined with reference to provisions for increased capacity, size, or strength in excess of what is required to fulfill the Association's building criteria for the load.

General and administration cost and cost of waste material and labor

Both the parties cannot capitalize the expense incurred by the customer (Dan Demolition) as these are the operational expenses made in the usual course of business.