Harshman Company constructed a building for its own use. The company incurred costs of $ 40,000 for materials and supplies, $ 68,000 for direct labor, and $ 7,000 for a supervisor’s overtime that was caused by the construction. Harshman uses a factory overhead rate of 50% of direct labor cost. Before construction, the company had received a bid of $ 162,000 from an outside contractor.
1. Assuming common practice is followed, at what value should Harshman capitalize the building?
2. What is the justification for determining the value described in Requirement 1?
3. Would your answer change if the bid from the outside contractor had been $ 135,000?