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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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What are the two common alternative treatments of overhead costs during self -construction of an asset? What are the arguments in favor of each?

To determine

Provide the two common alternative treatments of overheads costs during self-construction of an asset and provide some arguments in favor of each.

Explanation

Cost of self-constructed assets:

Company sometimes constructs an item of “property, plant and equipment” which is used in the business operations and these are known as self-constructed assets. The cost of self-constructed assets comprises of expenses that are required to build an asset and put it in operating condition.

Two alternative ways are there to allocate overhead costs to self-constructed assets and they are as follows;

(1) “To allocate a portion of overhead to the self-constructed asset”.

This method allots a portion of all overhead costs to the self-constructed asset. Under this method, productive output must absorb its proportionate share of all factory overhead costs. Additionally, this method result in a cost of the constructed asset that approximates the cost of the equivalent asset acquired...

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