Comments

  1. avatar says

    Dear Sir, Thanks for the excellent lectures. I was wondering why in example 5, for the costs recognised in year one you did not remove period specific cost of 40000 from general cost of 300000 before calculating the percentage of cost incurred that is 30% x (300000-40000+500000). I might not have understood the concept well but I think that is what you did in example 3.

  2. Profile photo of Swati says

    Dear Sir,

    There is this cost thing in the construction contract:

    Omega has an insurance policy to protect it against claims arising on its construction contracts. The directors estimate that a monthly premium of $50,000 can reasonably be allocated to this contract, together with general administrative overheads of $40,000 per month.

    So, my doubt is: Do we always take the insurance cost (if its attributed to the contract)
    and what about the general admin OH? The solution has not added it with other construction costs..? Any specific reason is there?

  3. Profile photo of Swati says

    Dear Sir,

    Here is a Dec -2008 question of Construction contract (Dipifr)

    On 1 October 2007 Delta began a substantial construction project for a customer. The fixed contract price was $60 million and the estimated duration of the contract was two years. On that date they purchased plant for $15 million and materials for $10 million, both amounts being for exclusive use on the contract. They debited both amounts to the contract account that appears in the trial balance. They also used employees at a monthly cost of $500,000 throughout the 12 month period beginning on 1 October 2007. These employee costs are included in production costs in the trial balance.
    On 1 October 2008 Delta purchased additional materials for exclusive use on the contract at a cost of $10 million. They expect to require employees to work on the contract at a monthly cost of $400,000 for the 12 month period to 30 September 2009 but these are the only additional costs they expect to incur in future on this contract. The plant and equipment purchased for use on the contract is expected to have no residual value on 30 September
    2009. The directors of Delta considered that the contract was 50% complete at 30 September 2008.

    Could you please have a look if the following solution is correct?

    Step1: Checking if the entire contract is profitable or loss-making:

    Total contract price = 60 mn
    Less: Total contract costs (15+10+6+10+4.8) = 45.8 mn
    Total expected Profit = 60-45.8 = 14.2 (Hence, its a profit making contract)

    Step2: P/L working:
    Revenue recognize= 50% of 60 = 30
    Less:
    period specific costs = (500000*12)= 6
    general costs= 50% [(15+10)+(10+4.8)]= 19.9

    => Attributable profits= 30- (6+19.9) = 4.1

    Please let me know where have I gone wrong ?

      • Profile photo of Swati says

        I am not sure about the ‘cost’ part. In Solutions, it says:
        Total expected costs:
        Plant: 15
        Material: 10+10
        Labour: 6+4.8
        Total= 45.8
        And, then 50% of 45.8 = 22.9 is recognised as cost of sales. But, in your lecture, it was told that we take 100% of the period specific cost.

        Can you please explain it?

      • Profile photo of MikeLittle says

        The materials cost is not period specific ie although it was incurred specifically in that first year, it didn’t need to be – it’s just part of the overall material cost

        A period specific cost is one that is incurred and that relates specifically to that particular period. Material costs are rarely specifically related to a specific period – they are merely the material costs of the entire contract.

      • Profile photo of Swati says

        Thank you Sir. I understand that material cost is not period specific.
        But what about the employee salary for that period (5,00,000 *12 months = 6mn) Wouldn’t this be considered as the period specific?

        And, why plant cost is included? Don’t we just take the depreciation of plant (for 1 yr) in the costs to be recognised in P/L?

      • Profile photo of MikeLittle says

        The plant has a two year life, it was bought on day 1 of the contract and dies on the completion of the contract. OK, just take the depreciation – it works out the same (because the plant was bought on day 1!)

        No (employee salaries) again, like materials, employees’ wages are simply a cost of the contract. If there had had to be some remedial work and the employees had had to work specifically on repairing the previous work, that would have been period specific.

        I’m going to generalise here (and I’ve never said this before (so I could be wrong!)) “a period specific cost is a cost that was not anticipated at the time the contract was started / signed but has been incurred because of some unforeseen event / circumstance”

        Now, I’ve not thought that through thoroughly, but as an initial thought, it’s not bad

        OK?

      • Profile photo of Swati says

        Great!
        Thanks a lot..
        So, in the costs, we always take the depreciation (for that period)
        Why employee salary is not ‘period specific’, I have understood.

        In short, I have understood it!

        Thanks again.
        Also, you earlier asked me if I have cleared F7 or not. Actually, its my first international exam and its DipIfr. I have not given any ACCA exam prior to this.
        I read your F7 & P2 lectures for preparing Dipifr.

      • Profile photo of MikeLittle says

        Ah, ok! It probably would have been easier if you had been an ACCA student that had already passed F7. But, no problem. It’s still there available for you to pass

  4. Profile photo of Swati says

    Dear Sir,

    Here is a Dec -2008 question of Construction contract (Dipifr)

    On 1 October 2007 Delta began a substantial construction project for a customer. The fixed contract price was $60 million and the estimated duration of the contract was two years. On that date they purchased plant for $15 million and materials for $10 million, both amounts being for exclusive use on the contract. They debited both amounts to the contract account that appears in the trial balance. They also used employees at a monthly cost of $500,000 throughout the 12 month period beginning on 1 October 2007. These employee costs are included in production costs in the trial balance.
    On 1 October 2008 Delta purchased additional materials for exclusive use on the contract at a cost of $10 million. They expect to require employees to work on the contract at a monthly cost of $400,000 for the 12 month period to 30 September 2009 but these are the only additional costs they expect to incur in future on this contract. The plant and equipment purchased for use on the contract is expected to have no residual value on 30 September
    2009. The directors of Delta considered that the contract was 50% complete at 30 September 2008.

    Could you please have a look if the following solution is correct?

    Step1: Checking if the entire contract is profitable or loss-making:

    Total contract price = 60 mn
    Less: Total contract costs (15+10+6+10+4.8) = 45.8 mn
    Total expected Profit = 60-45.8 = 14.2 (Hence, its a profit making contract)

    Step2: P/L working:
    Revenue recognize= 50% of 60 = 30
    Less:
    period specific costs = (500000*12)= 6
    general costs= 50% [(15+10)+(10+4.8)]= 19.9

    => Attributable profits= 30- (6+19.9) = 4.1

    Please let me know where have I gone wrong ?

    • avatar says

      yr1: costs to date : 300,000 +Est’d costs: 500,000 = 800,000
      800,000 x 30% = 240,000

      yr2: we estimated a loss =1,000,000 – (600,000+500,000) = (100,000)
      plus the specific periode (40,000) we’ll have a (140,000)
      so,Rev 650,000
      spec cost (40,000)
      gen costs ( since we estimated a loss then this will be the balancing figure)
      610,000 – x = -140,000
      x= 750,000
      loss recognised (140,000)
      I hope this is clear lol xD

    • avatar says

      40,000 does NOT occur in both years! I had that problem to. The column your looking at where 40,000 appears is a cumulative column and coz 40,000 was recognised in the first year you cant recognise again in the second. I think thats right

      • Profile photo of MikeLittle says

        That’s right Biggles.
        rcc002 – do you see the amount of 190,000? That’s also cumulative – it’s 40,000 from year 1, zero from year 2 and 150,000 from year 3

        so recognition os period specifics is 40,000 in year 1, and 150,000 in year 3 giving a total of period specifics of 190,000

        OK?

  5. Profile photo of tauraiversatile says

    Hi Mike, Thanks for the lecture.
    However, would you advise on the right procedure because BPP apportions both revenue rec and costs rec using the %ge completion when there is Recognised loss- and any balancing figure they call it “expected loss”, unlike the approach in this example where costs would not need to be apportioned using the %ge compl. method when a loss is recognised.
    Reference Question, Qn50, Books of Contract, 2012 Rev Kit, pg53. Thanks in advance!

  6. Profile photo of crye says

    It’s said losses expected should be recorded even if contract hasn’t bugun.

    But why would anyone even need to go that far, like … a commercial entity embarking on a loss venture?? Why?

    • Profile photo of Sangria9 says

      Or maybe next situation. Contract is signed with profit, but lately something changed (for example seller’s equipment damaged) and new expenses occur (seller know exactly that to start works under this contract he need to purchase new equipment or repair old) and seller can’t avoid performing contract (maybe penalties will much more higher than expected losses)..

  7. avatar says

    Good day Mike,

    I need clarification. In the event of a loss, the total loss is recognised immediately. In example 4, the Cost recognised was the balancing figure whereas the Revenue recognised was worked out based on the percentage completed.

    An example in Kaplan instead gave the Revenue recognised as the balancing figure and worked out the Cost recognised with the percentage completed.

    Are they accepted alternative ways of treating this situation?

  8. avatar says

    Hi Mike! Could you explain the presentation in the SFP when we have both amounts due to customers and from customers? Do we demonstrate separate lines in current assets and liabilities or we present one line depending on the total difference ?

    • Profile photo of MikeLittle says

      @1992825amaar, The 140 loss is the figure to be recognised by THE END of year 2. But we have already recognised 20 profit in year 1. So, in order that 140 loss should be recognised by the end of year 2, we need to recognise 160 loss in year 2 to give us 140 cumulative by end year 2.

      Better?

    • Profile photo of MikeLittle says

      @chenchen, Because a loss is forecast and that loss should be recognised in full in the year in which it is forecast.

      Therefore, we can determine the revenue figure ( 65% x 1 million ) and we know the forecast loss by simple calculation. Therefore the costs to be recognised becomes the missing figure

      OK?

    • Profile photo of MikeLittle says

      @kimcap28, Because, in the situation where an overall loss is forecast, the loss must be recognised in full in the year you realise that a loss will be suffered.

      In order to recognise the loss in full, the bottom line of working 1 must be completed immediately after the first line. So, now we have a figure for revenue and a figure for loss recognised. The missing figure of 510,000 is therefore the value of the costs to be recognised

      Better?

    • Profile photo of MikeLittle says

      @claudia1, Hi

      Yes, that is correct. I suppose possibly it COULD be a deferred asset to be invoiced after, say, 2 years – if that’s what the contract says. But, when I wrote the question, it was intended that it was a current asset

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