Question

Images Ltd. is a new company whose only operation is the development of a new kind of video camera that will link to home computers and easily allow image transfer. The camera will come with a program to allow editing, so customers can edit their home movies and, for example, airbrush pictures and alter backgrounds. The camera and software are protected by several patents and copyrights, but technology in the area is moving quickly, and competition is fierce from competing products with different technology. By the end of 2019, a prototype existed and was being used to solicit orders. The product itself is due out in the second quarter of 2020, in time for the Christmas season, which represents the vast majority of the annual camera-buying volume. In 2019, various costs were incurred: design costs ($1,351,600), engineering costs ($489,200), software development costs ($397,500), and market research costs ($68,900). Administration costs amounted to $1,340,000. Interest on bank loans was $125,000. Legal costs to register patents and copyrights amounted to $164,400. In addition, manufacturing equipment costing $900,000 was purchased and installed. It was used briefly to manufacture the prototype in the second quarter of 2019, but is primarily idle and will continue to be idle until the first quarter of 2020. At that time, commercial production will begin.

Required: Discuss the classification of the various costs listed above. As part of your response, include a list of any additional information you would like to have.

Answer 1

Answer-

Design Cost-Describes a systematic approach to controlling the costs of product development and manufacturing. The basic idea is that costs are designed into the product, even from the earliest concept decisions on and are difficult to remove later. In accounting, the cost of an item is allocated to the cost of an asset, as opposed to. Capitalization is allowed only for costs incurred to defend or register a patent, are complete, and the software application satisfies its design specifications.

Engineering costs- engineering is "the engineering practice devoted to the management of project cost, involving such activities as estimating, cost control, cost forecasting, investment appraisal, and risk analysis."Cost Engineers budget, plan and monitor investment projects.

Software development costs-In the speed of the technological evolution in hardware, new changes have to be made to the software to take advantage of the new hardware options. The cycle time of a hardware change has been faster and allows computers to speed up. Likewise, it has become an annual event or even twice a year that software releases come out. This is to take more and more advantage of the hardware leaps that have taken place. The structuring of software purchase and licensing fees has gone up as well, increasing the overall cost. All of these things have increased dollar payout for businesses. This payout is offsetting the savings that were gained when hardware prices were lowered with technological advances. The end result is that costs in information technology are still rising.

Market research costs- The cost of a specific market research program is determined by the research method used (face-to-face interviews are more expensive than phone interviews, for example) and the sample size needed. Larger firms will typically require a larger sample. Taking these variations into account, we have estimated the typical market research costs for both occasional types of research (once per year) and a program of frequent research (quarterly).

Administration costs- Administration costs, also known as overhead costs or fixed costs are the costs that incur business solely from running. Examples of administrative costs are taxes, rent, insurance, licensing fees, utilities, accounting, and legal teams, administrative staff, facility upkeep, etc.

Interest on bank loans- interest on bank loans is a financial expense that is charged on the amount of loan taken by a business for a period of time from the bank. bank interest is paid charges at a specific percentage that is pre-decided with mutual consent between the business owner and the bank.

Legal costs patents and copyrights- this is registration fees paid to the government to register his product as a specified brand name and after registration, that name could not be used by any other business concern. if someone uses this it will be against the law and legal action will be taken against those business concerns. in accounting terms, this type of expense has been capitalized by the business under the head intangible assets.