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  1. Avatar 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?

  2. Avatar 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 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?

      • Avatar 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.

      • Avatar 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?

      • Avatar 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?

      • Avatar 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.

      • Avatar 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

    • 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

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