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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Navkar Infra Ltd is building a bridge under a fixed price contract. The contract does not specify that general administration costs are reimbursable by the customer. The company's accountant is listing the costs to include in contract costs under AS 7. Which of the following should be excluded from contract costs?

Head office general administration costs are excluded from contract costs because the contract does not provide for their reimbursement. AS 7 includes site costs, directly related design costs, and allocable insurance and depreciation, but treats unreimbursable administration, selling and R&D costs as period costs.

  1. ADepreciation of a crane used only on the bridge site
  2. BGeneral administration costs at head officeCorrect
  3. CCosts of designing and technical assistance directly related to the bridge
  4. DInsurance premium on the bridge site works

Explanation

AS 7 excludes general administration costs, selling costs and research and development costs unless reimbursement is specified in the contract. Here no reimbursement is specified, so head office administration costs are excluded. The other three items are directly attributable to the contract or are allocable insurance and depreciation, so they are included.

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