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questions :What is the contract cost? For which industries is it suitable?
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[Visitor (112.21.*.*)]answers [Chinese ]Time :2022-01-24
Expenses that are included in the cost of the contract

Direct charges. Since direct expenses can be clearly distinguished from the beneficiaries when they are incurred, direct expenses are directly included in the contract costs when they are incurred.

overhead. Although indirect costs also constitute the components of the contract costs, indirect costs should generally not be directly attributed to the beneficiaries when they are incurred, but should be apportioned at the balance sheet date in a systematic and reasonable manner to include the contract costs.

In practice, the allocation methods of indirect costs mainly include the labor cost proportional method and the direct cost proportional method.
(1) Labor cost proportional method. The labor cost proportional method is a method of allocating overhead costs on the basis of the labor costs actually incurred in each contract. The calculation formula is as follows: indirect cost allocation rate = all indirect costs actually incurred in the current period÷ the sum of the labor costs actually incurred in each contract in the current period and the indirect costs to be borne in the current period of a contract = the labor costs actually incurred in the current period of the contract× the indirect cost allocation rate

For example, the first project management department of a construction company undertook the construction of three contract projects A, B and C at the same time, and it is known that the labor cost of the A contract is 1.4 million yuan, the labor cost of the B contract is 1.6 million yuan, and the labor cost of the C contract is 2 million yuan. The first project management department incurred a total of 500,000 yuan in indirect costs in the current period. Overhead allocation rate = 50÷ (140 160 200) = 10%
A Indirect costs to be borne by the contract = 140×10% = 14 (million yuan)

B Indirect costs to be borne by the contract = 160× 10% = 16 (million yuan)

C Indirect costs to be borne by the contract = 200×10% = 20 (million yuan)

Its accounting treatment is as follows:

Actual overhead costs incurred:

Debit: Engineering construction - indirect costs 500,000

Credit: Bank deposits, etc. 500 000

Overhead allocations are included in the cost of each contract at the balance sheet date:

Debit: Construction - Contract Cost - A Contract 140 000

-B Contract 160 000

-C Contract 200 000

Credit: Construction - Indirect costs 500,000

(2) Direct cost proportional method. The direct cost proportional method is a method of allocating indirect costs on the basis of the direct costs actually incurred in each contract. The calculation formula is as follows:
Indirect cost allocation rate = all indirect costs actually incurred in the current period÷ the direct costs actually incurred in each contract in the current period and the indirect costs to be borne in the current period of a contract = the direct costs actually incurred in the current period of the contract × the indirect cost allocation rate

Borrowing costs associated with the construction contract
The construction contractor constructs the asset for the client, usually the client raises funds and pays the construction contractor regularly for the progress of the project in accordance with the contract. However, the construction contractor may also borrow money from the bank during the construction of the contract for reasons such as capital turnover, and the borrowing costs may be incurred. Borrowing costs incurred by the construction contractor during the construction of the contract, which meet the capitalization conditions stipulated in Accounting Standard for Business Enterprises No. 17 - Borrowing Costs, shall be included in the contract costs. Borrowing costs incurred after the completion of the contract shall be included in the profit or loss of the current period and shall no longer be included in the cost of the contract.

Sporadic earnings
The sporadic income related to the contract refers to the non-recurring income obtained in the course of the execution of the contract, but should be deducted from the contract costs but not included in the contract income. For example, the proceeds obtained from the disposal of residual materials (such as scraps of some materials and materials produced during the construction process) after the completion of the contract. Since the value of the materials used in the project is directly included in the cost of the project, and the scraps of the materials and materials are included in the contract costs, the proceeds from the disposal of these residual materials should be offset by the contract costs.

Expenses that do not count towards the cost of the contract

The following expenses are period expenses and should be included in the profit or loss of the current period at the time of occurrence and not in the cost of the construction contract:
The administrative expenses incurred by the administrative department of the enterprise to organize and manage production and operation activities. The "corporate administrative department" referred to here includes the headquarters of the construction and installation company, the headquarters of the ship, aircraft, large machinery and equipment manufacturing and other enterprises.

Sales expenses of shipbuilding enterprises such as ships.

Borrowing costs incurred by an enterprise for the purpose of borrowing from a construction contract that does not meet the capitalization conditions set out in Accounting Standard for Business Enterprises No. 17 Borrowing Costs. For example, net interest expense, net exchange loss, financial institution fees and other finance costs incurred by the enterprise after the completion of the construction contract.
Related costs incurred as a result of entering into a contract. For example, travel expenses, bidding fees, etc. incurred by the enterprise in order to conclude the contract. The related expenses incurred as a result of the conclusion of the contract are directly included in the profit or loss of the current period at the time of occurrence and are accounted for through the "Management expenses" account.
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