Audit fees are classified as a component of__________.
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Answer: D. administration overhead
Explanation
Audit fees are an expense of running the business as a whole, so they are classified under administration overhead rather than selling or production costs. Because auditing relates to corporate governance and legal compliance, it supports overall institutional management. Therefore, it is pooled with general administrative expenses. Administrative overhead includes expenses necessary for general corporate management, such as legal fees, executive salaries, and office utilities. These costs are period expenses rather than product costs because they cannot be directly tied to manufacturing. They appear in the operating expense section of the income statement.
When a manufacturing corporation pays its external accounting firm for the yearly financial review, that disbursement goes into administrative expenses. This proper classification prevents distorting direct manufacturing or sales costs. Works on cost relates strictly to direct factory production expenses, which exclude corporate audits. Selling overhead covers expenses directly tied to marketing and selling goods, such as advertising. Distribution overhead involves costs incurred in delivering products to customers, like freight charges.
- Subject
- Accounting and Finance
- Category
- Accounting
- Topic
- —
- Difficulty
- medium
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