Which of the following costs are capitalized for self-constructed assets?

• A. Only direct materials and direct labor
• B. Direct materials, direct labor, and a portion of overhead costs
• C. Interest expense on unrelated loans
• D. Only indirect costs such as administrative expenses

Answer: (B)

Verified step by step guidance

1. Understand the concept of capitalizing costs: Capitalizing costs means recording them as part of the asset's value on the balance sheet rather than expensing them immediately. This is done for costs that provide future economic benefits.
2. Identify the types of costs associated with self-constructed assets: Self-constructed assets typically involve direct materials, direct labor, and overhead costs incurred during construction.
3. Determine which costs qualify for capitalization: Direct materials and direct labor are directly attributable to the construction process and are capitalized. Overhead costs, if they are related to the construction activity, can also be allocated and capitalized.
4. Exclude costs that do not qualify for capitalization: Interest expense on unrelated loans and indirect costs such as administrative expenses are not directly tied to the construction of the asset and are therefore not capitalized.
5. Summarize the correct answer: The costs that are capitalized for self-constructed assets include direct materials, direct labor, and a portion of overhead costs that are attributable to the construction process.