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Puglia Plc is constructing a skyscraper in the heart of town and has signed a fixed price three- year contract for $21m with the local authorities. It has incurred the following cost relating to the contract by the end of first year:
Material cost=5m
Labour cost=2m
Construction overhead=2m
Marketing costs=0.5m
Depreciation of idle ppe=0.5mAt the end of the first year, it has estimated costs to complete the contract as 9m. The company recognises revenue, costs and profits on a costs basis.
What profit or loss from the contract should Puglia Plc recognise at the end of the first year?
a)1.5m
b) 1.0m
c) 1.05m
d)1.28mModel Answer: 1.5 m
My answer is
Contract price 21m
Total estimated cost 19m (cost to date 10m +9m future estimated cost)
Profit 2m% of completion: 10/19=52.63%
Profit =2mX 52.63%= 1.05m
I don’t understand why the model answer is 1.5m. May I knw whether the way I do is it correct?
can clarify to me sir?
thanks youMarketing costs are not a cost of construction – they are … marketing costs
Similarly, the depreciation of idle ppe cannot be allocated against the contract – this expense would be lost in a different expense category and not treated as a construction cost
So total costs are $9 + $9 more with an overall estimated profit on the contract of $3
Costs are 50% incurred so profit is 50% recognised
OK?
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