The correct method to handle overhead costs in capital budgeting is to:
A)Allocate a portion to each project
B)Allocate them to projects with the highest NPVs
C)Ignore all except identifiable incremental amounts
D)Ignore them in all cases

Question

Quizplus · Accepted Answer

Overhead costs are indirect costs that cannot be directly attributed to a specific project. Therefore, they should be ignored in capital budgeting except for identifiable incremental amounts. This means that only the additional overhead costs that are directly related to a specific project should be included in the capital budgeting analysis. Other overhead costs should not be allocated to individual projects or considered in the decision-making process as they are not relevant to the specific project. Allocating overhead costs to projects with the highest NPVs (choice B) could potentially bias the decision-making process and lead to incorrect investment decisions.

The Correct Method to Handle Overhead Costs in Capital Budgeting