A manufacturing company buys a big machine and pays money for
A) the actual machine
B) the installation fees
C) training costs for employees
Assume this is a capital asset that will last many years.
According to the book, the installation fees are capitalized. Why is B treated different from C?
Arent they both similar in theory in the sense that both expenses happen one time and one time only?
I believe that the theory is that while the installation costs happen one time only, the training costs could happen many times (whenever you hire a new employee to operate the machine), or never (if you hire employees already trained in operating this type of machine), so that the training costs are more properly associated with the employees than with the machine itself.
In any case, you don’t capitalize training costs. You do capitalize:
- the price of the machine
- sales tax
- installation (including all expenses related to getting the machine installed and operable)
As an example of installation costs, years ago when I was a warhead designer, my company bought an hydraulic press. Because it was so heavy, a 2-foot thick concrete pad had to be added to the floor of the machine shop to bear the weight. The cost of that pad would then have to be capitalized as an installation cost.
I hadn’t considered that some newer employees might already have the training. This makes a lot more sense to me now, thanks.