A Company Is Constructing an Asset for Its Own Use

question 1

Multiple Choice

A company is constructing an asset for its own use. Construction began in 2010. The asset is being financed entirely with a specific new borrowing. Construction expenditures were made in 2010 and 2011 at the end of each quarter. The total amount of interest cost capitalized in 2011 should be determined by applying the interest rate on the specific new borrowing to the

• A) total accumulated expenditures for the asset in 2011.
• B) average accumulated expenditures for the asset in 2011.
• C) average expenditures for the asset in 2011.
• D) total expenditures for the asset in 2011.

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Definitions:

Fixed Cost

Costs that do not change with the level of production or output, remaining constant even as volume changes.

Relevant Range

The range of activity within which the assumptions about fixed and variable costs are valid. Beyond this range, cost behaviors may change.

Per Unit Basis

A method of cost allocation or measurement that divides a total by the number of units to find the cost per unit.

Fixed Production Costs

Manufacturing costs that remain constant regardless of the level of production, such as rent and salaries of permanent staff.