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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Bharat Infra Ltd is building a bridge for a state road authority under a construction contract. The contract does not provide for reimbursement of head-office costs. While working out the contract costs to be recognised under AS 7, the accountant lists four items. Which item must NOT be included in contract costs?

Head-office general administration costs are excluded from contract costs when the contract does not reimburse them. Site supervisor wages, depreciation of plant used on the site and site insurance are directly related or allocable to the contract, so AS 7 includes them in contract costs.

  1. AWages of site supervisors working on the bridge
  2. BDepreciation of cranes used only at the bridge site
  3. CGeneral administration costs of the head office, with no reimbursement under the contractCorrect
  4. DInsurance premium paid for the bridge site

Explanation

AS 7 includes costs directly related to the contract and costs attributable to contract activity in general that can be allocated to it, such as insurance and plant depreciation. General administration costs are excluded unless the contract specifically reimburses them. Site supervision, site-specific depreciation and insurance are all valid contract costs.

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