Advanced Accounting · AS 10 Property, Plant and Equipment

AS 10: Measurement of Cost of PPE and Components of Cost

Updated 4 October 2026 · Fact-checked

Under AS 10, an item of PPE is first measured at cost. Cost is the purchase price (after trade discounts, plus import duties and non-refundable taxes), plus costs directly attributable to bringing the asset to working condition, plus the initial estimate of dismantling costs only where an obligation exists and it is recognised as a provision under AS 29. Exclude administration, general overheads and abnormal wastage.

Understand Measurement of Cost of PPE and Components of Cost

Cost is what you record the asset at on day one. Every later number (depreciation, profit or loss on sale) depends on it. So the exam tests whether you can pick the right items and leave out the wrong ones.

AS 10 builds cost from three blocks. First, the purchase price: invoice price plus import duties and non-refundable purchase taxes, less trade discounts and rebates. Second, directly attributable costs of bringing the asset to its location and working condition for its intended use, such as site preparation, delivery and handling, installation and assembly, professional fees and testing costs. Third, the initial estimate of the cost of dismantling and removing the item and restoring the site. This is included only where you have an obligation to do so and it is recognised as a provision under AS 29. If no such obligation exists, it is not part of cost.

Some costs are never part of cost. These are administration and other general overheads, costs of opening a new facility, costs of introducing a new product or service (including advertising), costs of conducting business in a new location or with a new class of customer, initial operating losses, and abnormal wastage.

Capitalisation ceases when the asset is in the location and condition necessary to operate as intended by management. Costs incurred while an asset that is capable of operating as intended is yet to be put to use, or is under-utilised, are not capitalised.

For a self-constructed asset, apply the same principles as for an acquired asset. Use the cost of materials, labour and other direct costs, plus a fair share of production overheads on the same basis as for inventory. Internal profit is excluded. Abnormal amounts of wasted material, labour or other resources are excluded. Borrowing costs are capitalised only if they relate to a qualifying asset, as per AS 16.

If payment is deferred beyond normal credit terms, the cost is the cash price equivalent. The extra amount paid is interest, not cost. Subsequent expenditure is added to the carrying amount only if it increases the future benefits beyond the originally assessed standard of performance. Otherwise it is an expense of the period.

Key rules to remember

Cost of purchased PPE: Purchase price + import duties + non-refundable taxes − trade discounts and rebates + directly attributable costs + initial estimate of dismantling and restoration cost (only if an obligation exists and it is recognised as a provision under AS 29); Refundable taxes such as input credit-eligible GST are not part of cost. Include the dismantling estimate only where the AS 29 provision condition is met.
Cost of self-constructed PPE: Direct materials + direct labour + other direct costs + allocable production overheads − abnormal wastage; Do not include internal profit or general administration overheads.
Deferred payment: Cost = cash price equivalent; total payments − cash price = interest expense; Interest is recognised over the credit period, unless capitalised under AS 16.
Subsequent expenditure test: Capitalise only if it increases future benefits beyond the originally assessed standard of performance; Examples: extended useful life, higher output capacity, major quality improvement or cost reduction.
Capitalisation stops: Stop when the asset is in the location and condition necessary to operate as intended by management; Costs incurred after that point, including costs while the asset is yet to be put to use or is under-utilised, go to profit and loss.

How to solve Measurement of Cost of PPE and Components of Cost questions

Use this sequence for any cost computation or classification question.

1Identify the item and whether it is purchased, self-constructed or paid for on deferred terms.
2Start with the invoice price. Deduct trade discounts and rebates. For cash (settlement) discounts, follow the instruction given in the question, since AS 10 does not specifically address them.
3Add import duties and non-refundable taxes. Leave out taxes that can be claimed as credit.
4Go through each remaining item and ask: was it needed to bring the asset to location and working condition? If yes, add it. If it is general overhead, training, advertising, opening cost or operating loss, leave it out.
5Add the initial estimate of dismantling and restoration cost only if there is an obligation and it is recognised as a provision under AS 29.
6For self-constructed assets, remove abnormal wastage and internal profit. For borrowing costs, capitalise only for a qualifying asset, and only until substantially all the activities needed to prepare it for its intended use are complete. Suspend capitalisation during extended periods when active development is interrupted.
7For deferred payment, take the cash price as cost and treat the balance as interest.
8For later spending, decide capital versus revenue using the future benefits test. If a part is replaced, derecognise the carrying amount of the replaced part. Then show the revised carrying amount and depreciation if asked.

Quickest way: Include or exclude: the two-column scan

When to use it: Use when the question lists many costs and asks for the total cost of the asset, and for MCQs on what can be capitalised.

Draw two columns, Capitalise and Expense. Tick each item as you read it.
Put in Capitalise: price, duty, non-refundable tax, freight, installation, testing, professional fees, site preparation, dismantling estimate (only where an obligation exists and it is recognised as a provision under AS 29), wages of staff directly on the project.
Put in Expense: general overheads, training, advertising, opening costs, initial losses, abnormal wastage, repairs, costs after readiness, idle time.
Add only the first column. Show each item on its own line with a label, because step marks are given for each correct inclusion and exclusion.
In MCQs, eliminate any option that includes general overheads or recoverable taxes. Then check how the question treats cash discounts and whether the cash price rule applies.

Common mistakes in Measurement of Cost of PPE and Components of Cost

Capitalising general administration overheads or a share of head office salaries.
Students feel every cost around the project belongs to the asset.
Fix: Include only costs directly attributable. Allocate production overheads only where they relate to construction.
Including GST that is eligible for input credit in the cost.
Students add the full invoice amount.
Fix: Add only non-refundable taxes. Credit-eligible tax is recoverable and not a cost.
Including abnormal wastage or internal profit in a self-constructed asset.
Students copy the total of the cost sheet.
Fix: Strip out abnormal losses and any profit margin before capitalising.
Capitalising costs incurred once the asset can operate as intended, or while it is yet to be put to use or is under-utilised.
Students treat any cost on the asset as capital.
Fix: Stop capitalising when the asset is in the location and condition necessary to operate as intended by management. Later initial operating losses and costs of under-use go to profit and loss.
Treating the whole deferred payment amount as cost.
Students add up instalments.
Fix: Take cash price as cost. The excess is interest.
Capitalising all repairs and maintenance.
Students confuse maintenance with improvement.
Fix: Capitalise only when future benefits exceed the earlier standard of performance. Routine repairs are expenses.

Worked examples

Example 1

X Ltd bought a machine with list price ₹10,00,000. Trade discount 10%. Import duty ₹50,000. GST of ₹1,62,000 is eligible for input credit. Freight ₹30,000, installation ₹40,000, testing cost ₹20,000, staff training ₹25,000 and general administration overhead allocated ₹35,000. Compute cost of the machine.

Show the solution

Price after trade discount: ₹10,00,000 − ₹1,00,000 = ₹9,00,000.
Add import duty ₹50,000. Total ₹9,50,000.
GST is eligible for credit, so exclude it.
Add freight ₹30,000, installation ₹40,000 and testing ₹20,000: ₹90,000. Total ₹10,40,000.
Exclude staff training ₹25,000 and general administration overhead ₹35,000, as they are not directly attributable.

Answer: Cost of the machine = ₹10,40,000.

Example 2

Y Ltd constructed a plant for its own use. Materials consumed ₹8,00,000 including abnormal wastage of ₹40,000. Direct labour ₹3,00,000. Production overheads allocable ₹1,00,000. General administration overheads ₹60,000. The cost sheet also shows an internal profit loading of ₹1,50,000 (a notional margin added to the plant's value; it is not a cost). Architect fees ₹20,000. Calculate cost of the plant. Later in the year Y Ltd spent ₹70,000 on replacing a part which increased output capacity and ₹15,000 on routine repairs. State the treatment of this later spending.

Show the solution

Materials net of abnormal wastage: ₹8,00,000 − ₹40,000 = ₹7,60,000.
Add direct labour ₹3,00,000. Total ₹10,60,000.
Add production overheads ₹1,00,000. Total ₹11,60,000.
Add architect fees ₹20,000, a directly attributable professional fee. Total ₹11,80,000.
Exclude general administration overheads ₹60,000, as they are not directly attributable. Exclude the ₹1,50,000 internal profit loading as well. It is a profit loading, not a cost, so it never forms part of the cost build-up above. The abnormal wastage of ₹40,000 was already removed from materials in the first step.
Subsequent expenditure: the ₹70,000 increases output capacity, so it increases future benefits beyond the originally assessed standard of performance. Capitalise it. Because it replaces a part, derecognise the carrying amount of the replaced part, if any, from the asset's carrying amount. The ₹15,000 routine repairs only maintain the existing standard of performance, so charge them to profit and loss.
Note: the question gives no carrying amount for the replaced part, so no derecognition figure can be computed here. If one were given, you would remove it from the carrying amount when you add the ₹70,000.

Answer: Cost of plant = ₹11,80,000. Capitalise the ₹70,000 as subsequent expenditure, and derecognise the carrying amount of the replaced part, if any. Expense the ₹15,000 repairs.

Exam tips

Show a line-by-line cost statement with the reason for each exclusion. Markers award marks for each correct item.
Read the data for traps: trade discount, refundable taxes, training, and abnormal wastage. These are the usual distractors.
For borrowing costs, check whether the asset is a qualifying asset and the period of capitalisation. Capitalisation is suspended during extended periods when active development is interrupted, and it ceases when substantially all activities needed to prepare the asset for use are complete. Then compute using the AS 16 method.
In theory questions, answer in a fixed format: rule, facts, conclusion. Name AS 10 and quote the test used.
In MCQs, check for the words capital improvement versus repairs. That one word decides the answer.

Practice questions from AS 10 Property, Plant and Equipment

Measurement of Cost of PPE and Components of Cost in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Measurement of Cost of PPE and Components of Cost: frequently asked questions

Which costs are directly attributable under AS 10?

Costs that arise directly from bringing the asset to its location and working condition. Examples are employee costs arising from construction, site preparation, delivery, handling, installation, testing and professional fees. General overheads are not included.

Can I capitalise trial run losses?

Costs of testing whether the asset functions properly are capitalised. Initial operating losses once the asset is ready for use are not. Read the question to see which stage the cost belongs to.

How do I treat deferred payment for a PPE item?

Record the asset at the cash price equivalent. The difference between total payments and the cash price is interest, charged over the credit period unless capitalised under AS 16.

When is subsequent expenditure capitalised?

Only when it increases the future benefits from the asset beyond its previously assessed standard of performance, for example by extending life, raising capacity or improving quality. Routine repairs and maintenance are expenses.