CAF-7 · Chapter 13 · Question 13 of 15
A business is evaluating a project. General fixed overheads of the head office, amounting to Rs. 200,000, have been allocated to this specific project by the accounting department. In the NPV calculation, this allocated overhead should be:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Completely ignored, as general allocated overheads are not incremental cash flows
Explanation
Under relevant costing principles, apportioned or allocated general fixed overheads are ignored because they are incurred by the company regardless of whether the project is accepted or rejected. They do not represent new, incremental cash outflows.
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