How to Capitalize the Labor Cost of Factory Engineers Building Production Equipment for In-House Use
Transferring factory engineer wages from salary expense to Construction in Progress when they are building a new machine for the company's own use.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Construction in Progress (Asset) | Asset (+) | 5,000.00 | - |
| Salaries & Wages (Factory) | Expense (-) | - | 5,000.00 |
💡 Accountant's Note
If your own staff builds a machine, their salary for that time is not a period expense — it is part of the cost of the machine and must be moved to the balance sheet.
Practitioner & Systems Framework
💻 ERP Architecture
Self-constructed assets are capitalized at cost, including: direct materials used, direct labor (wages of engineers and workers building the asset), directly attributable overhead (power consumed during construction, design software), and borrowing costs if applicable under IAS 23. Track self-construction costs on a separate CIP project code. When the machine is complete and ready for its intended use, transfer from CIP to Machinery & Equipment and begin depreciation. The labor capitalization credit reduces the factory salary expense for the period — management must track the allocation to ensure it is accurate and not over-stated.
⚠️ Audit Flags
Auditors require documented evidence that the engineer's time was genuinely spent on the construction project (timesheets or project tracking records). Over-capitalizing labor (including time not actually spent on construction) inflates assets and understates period expenses. The capitalized labor rate must be the employee's actual salary rate — not a higher transfer price. Borrowing costs (IAS 23) may also be capitalizable if the construction is financed by a qualifying borrowing.
📄 Required Documentation
Project timesheets (engineer name, hours on project, date), wage rate documentation, CIP project code and cost accumulation, materials used in construction (from manufacturing-raw-materials-issue-to-wip), directly attributable overhead, IAS 23 borrowing cost assessment, CIP to Machinery & Equipment transfer when complete, and depreciation start date documentation.
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Expert Analysis by Qusai Ahmad
General Accountant Supervisor & IFRS Specialist
Specialized in SAP GUI automation and Middle Eastern tax compliance. Building digital tools for the next generation of finance leaders.