Answer
The exclusion of fixed manufacturing overhead is based on the rationale regarding the fixed nature of indirect overhead. Consequently, when a company constructs a plant, the indirect overhead is not impacted. The indirect overhead will be incurred even when an asset is not constructed by an entity. Charging some of the overhead costs to the plant will result in an overstatement of income and a reduction of expenses in the current reporting period.
Assignment of some of the overheads to assets and plants under the full-costing methodology is justified because it results in the attachment of products to the assets that are set up by an entity. Proponents of the full-costing method assert that the assets’ initial cost could be understated when overhead costs are not allocated to assets accordingly.
Work Step by Step
The exclusion of fixed manufacturing overhead is based on the rationale regarding the fixed nature of indirect overhead. Consequently, when a company constructs a plant, the indirect overhead is not impacted. The indirect overhead will be incurred even when an asset is not constructed by an entity. Charging some of the overhead costs to the plant will result in an overstatement of income and a reduction of expenses in the current reporting period.
Assignment of some of the overheads to assets and plants under the full-costing methodology is justified because it results in the attachment of products to the assets that are set up by an entity. Proponents of the full-costing method assert that the assets’ initial cost could be understated when overhead costs are not allocated to assets accordingly.
