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TYU 8
Merryview specialises in long-term contracts. In each contract
Merryview is entitled to receive payments reflecting the progress of the
work, so revenue should be recognised over time.
One of its contracts, with Better Homes, is to build a complex of luxury
flats. The price agreed for the contract is $40 million and its scheduled
date of completion is 31 December 20X2. Details of the contract to
31 March 20X1 are:
Commencement date 1 July 20X0
Contract costs: $000
Architects’ and surveyors’ fees 500
Materials 2,800
Direct labour costs 3,500
Overheads are apportioned at 40% of direct labour
costs
Estimated cost to complete
(excluding depreciation – see below) 14,800
Plant and machinery used exclusively on the contract cost $3,600,000
on 1 July 20X0. At the end of the contract it is expected to be
transferred to a different contract at a value of $600,000. Depreciation
is to be based on a time-apportioned basis. Better Homes made a
progress payment of $12,800,000 to Merryview on 31 March 20X1.
SOLUTION
Overall contract
31 March
20X1
$000
Price 40,000
––––––
Costs to date:
Architects’ and surveyors’ fees 500
Materials used 2,800
Direct labour 3,500
Overheads (40% of 3,500) 1,400
Depreciation
($3m/30 months × 9 months) 900 ––––––
Total costs to date 9,100Good day sir,I don’t understand why the cost of the machine wasn’t added to the costs to date since it was used in the contract. I’ll appreciate if you can explain better
What should be done is add the cost of machine to the total cost of the contract.
and when finding cost to date only the depreciation is to be added. the same principle of using depreciation which is allocating the cost to the period of use right. and hence only depreciation cost to be added to “cost to date”
hope this clarifies.Hi,isn’t the cost to date needed to calculate the overall contract cost?.In the soution, the cost of the machine was totally excluded when calculating the cost of the contract
Hi,
It is a funny question as usually we are given the costs to date in the question but here it is asking you to calculate them from the information given. They have done this correctly with regards to the depreciation as they have only included half of it, given we are half way through the contract. The other half of the depreciation would be part of the costs to complete that we would use to see if the contract is profitable.
Thanks
Hi,I understand why half of the depreciation was part of the costs to date.I don’t understand why the 3,600,000 for the machinery wasn’t included in the cost to date since it was used exclusively for the contract.
Because this is the full cost of the machinery, we only include the depreciation charged upon it to date. Check out the dates within the question, i.e. when we started the contract and the current reporting date. How many months is it?
Thanks
So the cost is excluded because it wasn’t bought at the start of the contract? For example, If the question had said that the machine was bought at the start of the contract, will the full cost be included in the cost to date?
Yes, that’s correct. The questions need to be read very carefully as the examiners are going to try and trick you!
Thanks!
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