An Asset Is Being Constructed for an Enterprise's Own Use

question 67

Multiple Choice

An asset is being constructed for an enterprise's own use.The asset has been financed with a specific new borrowing.The interest cost incurred during the construction period as a result of expenditures for the asset is

• A) a part of the historical cost of acquiring the asset to be written off over the estimated useful life of the asset.
• B) interest expense in the construction period.
• C) recorded as a deferred charge and amortized over the term of the borrowing.
• D) a part of the historical cost of acquiring the asset to be written off over the term of the borrowing used to finance the construction of the asset.

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Definitions:

Fixed Manufacturing Overhead

Consists of manufacturing costs that do not change with the level of production, such as salaries of supervisors and rent for factory premises.

Denominator Level

The level of activity used to compute the fixed manufacturing overhead rate in absorption costing, affecting inventory and cost of goods sold.

Budget Variance

The difference between budgeted amounts and actual amounts spent or received.

Volume Variance

The difference between the expected volume of production or sales and the actual volume, affecting budgeting and costing.