When a Firm Constructs Its Own Buildings or Equipment

question 37

Multiple Choice

When a firm constructs its own buildings or equipment:

• A) it recognizes the labor, material, and overhead costs incurred as an asset.
• B)U.S.GAAP and IFRS require firms to include, or capitalize, interest costs during construction in the cost of a self-constructed asset.
• C) it recognizes the labor, material, and overhead costs incurred as a period expense.
• D)U.S.GAAP and IFRS require firms to expense interest costs incurred during construction of a self-constructed asset.
• E)both choices a and b are correct.

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Definitions:

Indirect Cost

Costs that are not directly attributable to a specific job, product, or activity, often including overhead expenses like utilities and rent.

Indirect Material

Materials used in the production process but cannot be directly traced to a final product, such as lubricants and cleaning supplies used in a factory.

Factory Overhead

Encompasses all indirect costs involved in the manufacturing process, such as utilities, maintenance, and management salaries.

Direct Materials

Raw materials that can be directly attributed to the production of goods or services.