Costs That Have Been Carried Forward for a Specific Area

question 11

Multiple Choice

Costs that have been carried forward for a specific area of interest are to be amortised against revenue earned during the production phase.How is the amortisation of the costs to be calculated?

• A) Any generally accepted amortisation method may be used except for the inverse-of-the-sum-of-the-years'-digits method.
• B) The costs should be amortised in proportion to the expected revenue stream, so that a higher proportion of costs are matched against higher revenue streams, especially where they occur as a result of greater quality product in the early years of production.
• C) The costs should be amortised straight-line over a period of not greater than 20 years.
• D) The costs should be allocated over the life of the economically recoverable reserve in terms of production output or in terms of time in circumstances such as where there is a fixed period of tenure or the limiting factor is the length of the mining right.
• E) None of the given answers.

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Definitions:

Total Cost Method

An accounting method that includes all costs related to the production of goods when calculating inventory cost.

Nonproduction Costs

Expenses not directly associated with the manufacturing or production of goods, such as selling, administrative, and other overhead costs.

Production Costs

Expenses directly associated with the creation of goods or services, including raw materials, direct labor, and manufacturing overhead.

Markup

The amount added to the cost price of goods to cover overhead and profit.