Question

THE COMPANY OPERATES A SEASONAL MANUFACTURING BUSINESS. IN ORDER TO MAINTAIN A HIGH QUALITY WORK FORCE, THE COMPANY MUST PAY ITS EMPLOYEES FOR 12 MONTHS EACH YEAR. DURING THE SLOW SEASON THIS YEAR THE COMPANY USED ITS PRODUCTION EMPLOYEES TO CONSTRUCT AN ADDITION TO THE BUILDING. WHICH IS CORRECT

ALL OF THE EMPLOYEE'S COMPENSATION MUST BE ADDED TO THE COST OF INVENTORY PRODUCED DURING THE PERIOD BECAUSE THE COST WAS INCURRED BY REASON OF PRODUCTION

THE EMPLOYEE'S COMPENSATION DURING THE SLOW PERIOD BECOMES A COST OF THE BUILDING CONSTRUCTED

THE EMPLOYEE COMPENSATION DURING THE SLOW PERIOD CAN BE EXPENSED AS IDLE TIME

THE WORKER'S COMPENSATION INSIRANCE PAID DURING THE BUILDING CONSTRUCTION CAN BE DEDUCTED AS INCURRED

Answer 1

When the employees are used for construction of building of the company which is a fixed asset, all the employees related expenses shall be capitalized as building costs.

These costs shall not be added to inventory since they are not incurred for production of inventory purposes and no direct nexus is established between cost incurred and production made.

Hence the correct option is Option 2- The Employees compensation during the slow period becomes cost of the building constructed.