120-0091-1
IBS Center for Management Research
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Fixed Assets Accounting - Identification and Classification of
Expenses as Fixed Assets
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This caselet was written by Nagendra Kumar M V and Indu Perepu, IBS Hyderabad. It was
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compiled from generalised experience, and is intended to be used as a basis for class discussion
rather than to illustrate either effective or ineffective handling of a management situation.
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120-0091-1
Fixed Assets Accounting - Identification and
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Classification of Expenses as Fixed Assets
Kavitha had started the process of launching a saree manufacturing unit on leased land after
undertaking a detailed study and obtaining all the required permissions. The manufacturing unit
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was called Kavitha Textile Manufacturers (KTM) and the process was started on April 1, 2018.
Construction work for the unit was given to a construction company and it was estimated to be
completed at a cost of Rs. 1 million. All the construction costs had to be borne by the construction
company. However, Kavitha spent around Rs. 0.10 million on the preparation of the construction
plan and on other consultancy charges. Simultaneously, Kavitha placed an order for manufacturing
equipment. Once the orders had been processed, the suppliers of the manufacturing equipment
visited the construction site and made arrangements for the installation of the equipment at the
desired places. In addition to the price of the equipment, the suppliers charged an additional sum in
the form of site preparation charges, delivery charges, and other installation and professional
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charges required to bring the equipment, install it in the plant, and make it ready for production
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(Refer to Exhibit-I for the additional costs incurred on installation of manufacturing equipment).
Apart from incurring these costs, Kavitha also had other expenses – the salaries of the operational
staff, wages for the workmen for establishing a temporary office at the construction site, and other
charges toward the purchase of furniture and other office equipment. All these amounted to Rs.
0.20 million during the first three months. However, within four months, all the activities needed
for the commencement of the production operations had been completed successfully, including
installation of the necessary manufacturing equipment.
On August 1, 2018, KSM commenced trial operations at the manufacturing site. These were
carried out for 7 days and cost Rs. 50,000. After successfully completing the trial operations, KTM
planned to launch commercial operations on September 1, 2018. However, the commercial
operations started only on September 10, 2018. KTM had to pay labor charges amounting to
Rs.25,000 for nine days though there was no production.
BACKGROUND
Kavitha, a homemaker and graduate in fashion designing, was earlier working from home as a
designer on a part-time basis. She was popular for designing unique sarees. One day she met a
friend, who told her about an opportunity to start a small scale saree manufacturing unit. Her friend
advised her to make use of the opportunity as she herself was unable to do so due to prior
obligations. At first, Kavitha was not interested as she had personal commitments. However, her
friend convinced her to take up the project as she had the skill of designing fashionable sarees. Her
friend also advised Kavitha to start a training facility simultaneously, so that she could train more
designers. Finally, with the support of her friend and that of her husband, Kavitha initiated the
process of starting the saree manufacturing unit. She got the required approvals from the
government. The launch of a manufacturing unit was not simple; it required a lot of administrative
expertise, managerial skills, as well as financial support. Kavitha’s friend assisted her in acquiring
all the required resources while her husband helped her to obtain the required loans. With their
support, she started the process of setting up a manufacturing unit on January 01, 2018.
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INITIAL STEPS
Along with her friend, Kavitha met many industry experts working in the textile industry. She took
their inputs in terms of how effectively the investment could be managed, and how production and
distribution processes had to be undertaken. She visited some saree manufacturing units and
studied the process of saree manufacture. Simultaneously, she also worked on completing other
formalities like land acquisition and identification of the necessary manufacturing equipment.
Kavitha leased 3 acres of land at a cost of Rs. 0.50 million per acre for 10 years. She also planned
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to source raw cotton and silk fabric. The cost of the fabric varied depending on quality and
quantity, and ranged from Rs. 15 per meter to Rs. 300 per meter. The quantity of material to be
sourced would be decided once formal operations commenced.
In addition, Kavitha also focused on recruiting the manpower needed for carrying on designing
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processes and for the production and operational activities. An important part of the planning stage
was purchase of the core equipment needed for manufacturing sarees. The different types
machinery used in the process of manufacturing designer sarees included the Shearing Butta
Cutting Machine, a fabric folding machine, printing machinery, Loop machine, washing machine,
and dyeing machine1.
The price of the equipment varied depending on the manufacturer. However, after a detailed study,
Kavitha decided to purchase the machinery from a set of standard manufacturers. The price of the
each equipment is shown in Table-1.
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Table-I: Equipment Required for a Small Scale Sarees Manufacturing Unit
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Equipment Cost of the Equipment (Rs. in millions)*
Shearing Machine 0.50
Folding machine 0.35
Printing machine 0.20
Loop Machine 0.80
Washing Machine 0.50
Dyeing Machine 0.35
* The prices mentioned here are approximate values. In practice, the actual prices of the equipment
vary depending on the capacity and the type of the manufacturer. Hence, these figures can be
considered as approximate prices.
Source: Prepared by Author based on the information compiled from different published sources
DISCUSSION QUESTIONS
1. What are the criteria specified in Accounting Standard-10 (Accounting for Fixed Assets) for
the identification and categorization of fixed assets? Discuss the guidelines and specifications
using the case of Kavitha Textile Manufacturers (KTM).
2. What are the various kinds of costs that are attributable to fixed assets? Discuss the principles
guidelines mentioned in Accounting Standard-10 (Accounting for Fixed Assets) using the case
of Kavitha Textile Manufacturers (KTM).
1
Specifications are determined based on the information compiled from different published sources
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Exhibit-I:
Additional Costs Incurred on Manufacturing Equipment
Equipment Additional costs (Rs.)*
Shearing Machine 50,000
Folding machine 25,000
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Printing machine 20,000
Loop Machine 75,000
Washing Machine 50,000
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Dyeing Machine 25,000
* The costs mentioned are approximate values; in practice, the additional costs vary depending on the
capacity and type of manufacturer. Hence, these figures can be considered as an approximate of the
actual prices.
Source: Prepared by Author based on the information compiled from different published sources
Educational material supplied by The Case Centre
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