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builders ltd has undertaken to refurbish the black swan hotel the contract price was 644113

Builders Ltd has undertaken to refurbish the Black Swan Hotel. The contract price was agreed at £480,000 based on estimated total costs of £440,000. The contract work began on 1 January Year 8. The accounting year of Builders Ltd ended on 31 August Year 8 at which date the contract was not completed. The following information provides the full contract estimate and the payments up to 31 August:

 

Original estimate for full contract

£

Actual cash paid

up to 31 August

£

Subcontractors’ costs:

 

 

Substructure

21,910

20,050

Superstructure

140,660

135,200

External works

111,256

95,000

Main contractors’ costs:

 

 

Materials –

 

 

Internal finishing

22,800

23,370

Fittings and furnishings

9,300

10,000

Utilities

42,400

31,800

Direct labour and overheads –

 

 

Internal finishing

23,100

17,325

Fittings and furnishings

9,100

6,916

Utilities

39,100

30,107

Administration overhead

20,374

15,402

 

440,000

385,170

Further information:

1 The substructure was completed on 31 July but a subcontractor’s invoice for £2,500 in respect of the final work done was not paid until 4 September.

2 The superstructure was also completed on 31 July and subcontractors were paid in full during August.

3 External works were 80% completed at 31 August. There was a delay in March due to adverse weather affecting the pebble dashing, which cost £3,500 to remove and restore.

4 Cash paid for materials for internal finishing covered the cost of all paint and wallpaper necessary to complete the contract. The actual paint and wallpaper unused at 31 August was valued at £4,000.

5 All fittings and furnishings required for the contract had been bought and paid for before 31 August. Only 70% by value had been installed by 31 August.

6 Materials costs of utilities were 80% complete in respect to estimates.

7 Labour hours worked up to 31 August on internal finishing, fittings and furnishings and services were 70% of the estimated total.

8 Administration overhead is allocated as a percentage of total sales value.

9 It is company policy to credit to management profit and loss account not more than 75% of the profit earned in any period.

10 It is estimated that the main contractor’s material and labour costs for the remainder of the contract will be incurred at the same rate as was experienced up to 31 August.

11 An independent surveyor estimated the contract value of work done up to 31 August at £400,000.

12 On 31 August the customer paid £380,000 on account of work completed.

Required

Prepare a report for the directors of Builders Ltd containing:

1 The profit on the contract for the accounting year ended 31 August Year 8 in a form which highlights variances from the initial estimate.

2 An estimate of the actual profit to be achieved on the contract as a whole.

3 Brief comments on the contract outcome.

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