13 February 2010
Dear All, We have a client engaged in residential flat contruction. The project is not yet completed. Can The normal admin expenses and other expenses not directly connected to construction, cna it be taken to WIP and showing a nil P&L account.
Please quote the relevant AS and note to accounts on the same
14 February 2010
Revenue has to be booked on % of completion method as prescribed in AS-7. Since project has been commenced, question of WIP does not arise, if AS-7 is followed.
14 February 2010
As per AS-7, construction contracts, Contract costs includes the following:- (a) costs that relate directly to the specific contract; (b) costs that are attributable to contract activity in general and can be allocated to the contract; and (c) such other costs as are specifically chargeable to the customer under the terms of the contract Such costs are allocated using methods that are systematic and rational and are applied consistently to all costs having similar characteristics. The allocation is based on the normal level of construction activity. Construction overheads include costs such as the preparation and processing of construction personnel payroll. Costs that may be attributable to contract activity in general and can be allocated to specific contracts also include borrowing costs as per Accounting Standard (AS) 16, Borrowing Costs.
So, on the basis of above, we can conclude that the normal admin expenses and other expenses those not directly connected to the contract can be part of the contract cost. But have to allocate on some basis e.g Admin deptt take care of payroll, billing and accounting and other aspects but its policy of the company how and how much to allocate indirect expenses. It depends upon the projects handling and other aspects also.
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