Question

Question: Two positions have normally been taken with respect to the recording of fixed manufacturing overhead as an element of the cost of plant assets constructed by a company for its own use: (a) It should be excluded completely. (b) It should be included at the same rate as is charged to normal operations.

What are the circumstances or rationale that support or deny the application of these methods?

Short answer

Answer

Rationale for exclusion is fixed manufacturing cost did not increase the cost of the company. Rationale for inclusion is cost incurred is related to the construction or production of all goods and assets.

Step-by-step solution

Rationale for the complete exclusion of the fixed manufacturing overhead cost

According to the argument, fixed manufacturing cost is excluded from the cost of plant assets constructed by the company for own use. Reason behind the exclusion of the assets is that fixed manufacturing overhead considers as fixed cost. But fixed cost does not increase when company construct the asset. As per this argument, fixed cost of company remains same whether company construct asset or not.

Rationale for inclusion of fixed manufacturing overhead rate

According to this argument, fixed manufacturing overhead is allocated on the pro rata basis to the constructed assets as it is charged to normal operations. Because in this approach, it is follows that all cost incurred also attached to the constructed assets along with normal production.