diff --git a/Makefile b/Makefile
index 27e3f3c6c62..44c0713dab3 100644
--- a/Makefile
+++ b/Makefile
@@ -218,7 +218,7 @@ objtree		:= .
 src		:= $(srctree)
 obj		:= $(objtree)
 
-VPATH		:= $(srctree)
+VPATH		:= $(SOURCE_DIR_PARENT) $(srctree)
 
 export srctree objtree VPATH
 
@@ -731,13 +731,13 @@ export KBUILD_IMAGE ?= zephyr
 zephyr-dirs	:= $(patsubst %/,%,$(filter %/, $(core-y) $(drivers-y) \
 		     $(libs-y)))
 
-zephyr-app-dirs	:= $(patsubst %/,%,$(filter %/, $(app-y)))
+zephyr-app-dirs	:= $(SOURCE_DIR)
 
 zephyr-alldirs	:= $(sort $(zephyr-dirs) $(zephyr-app-dirs) $(patsubst %/,%,$(filter %/, \
 		     $(core-) $(drivers-) $(libs-) $(app-))))
 
 core-y		:= $(patsubst %/, %/built-in.o, $(core-y))
-app-y		:= $(patsubst %/, %/built-in.o, $(app-y))
+app-y		:= $(patsubst %, %/built-in.o, $(notdir $(zephyr-app-dirs)))
 drivers-y	:= $(patsubst %/, %/built-in.o, $(drivers-y))
 libs-y1		:= $(patsubst %/, %/lib.a, $(libs-y))
 libs-y2		:= $(patsubst %/, %/built-in.o, $(libs-y))
@@ -879,8 +879,9 @@ $(zephyr-dirs): prepare scripts
 	$(Q)$(MAKE) $(build)=$@
 
 PHONY += $(zephyr-app-dirs)
+$(zephyr-app-dirs): zephyr-app-dir-root = $(abspath $(patsubst %, %/.., $@))
 $(zephyr-app-dirs): prepare scripts
-	$(Q)$(MAKE) $(build)=$@
+	$(Q)$(MAKE) $(build)=$(@F) srctree=$(zephyr-app-dir-root)
 
 # Things we need to do before we recursively start building the kernel
 # or the modules are listed in "prepare".
diff --git a/Makefile.inc b/Makefile.inc
index 289f9b67756..4953f0dc8e3 100644
--- a/Makefile.inc
+++ b/Makefile.inc
@@ -39,11 +39,12 @@ $(error BOARD is not defined!)
 endif
 
 SOURCE_DIR ?= $(PROJECT_BASE)/src/
-# Kbuild doesn't work correctly if this is an absolute path
-# FIXME Do not depend on python
-override SOURCE_DIR := $(shell python -c "import os.path; print(\"%s\" % os.path.relpath(os.path.realpath('$(SOURCE_DIR)'), os.path.realpath('$(ZEPHYR_BASE)')))")/
+override SOURCE_DIR := $(abspath $(SOURCE_DIR))
 override SOURCE_DIR := $(subst \,/,$(SOURCE_DIR))
-export SOURCE_DIR
+override SOURCE_DIR_PARENT := $(patsubst %, %/.., $(SOURCE_DIR))
+override SOURCE_DIR_PARENT := $(abspath $(SOURCE_DIR_PARENT))
+override SOURCE_DIR_PARENT := $(subst \,/,$(SOURCE_DIR_PARENT))
+export SOURCE_DIR SOURCE_DIR_PARENT
 
 ifeq ("$(origin V)", "command line")
   KBUILD_VERBOSE = $(V)