220-CCM ASSIGNMENT

1. The firm is financially better off by embarking on the intended projects as shown here below.

Balance Sheet After Investing
Assets		GB ‘000,000	Calculations
Net Fixed Assets	70		Cash&Current Assets	GB’000,000
Cash &Current Assets	16.08		ROA	0.15*70	10.5
Total Assets	86.08		ROI	0.2*30	6
				Less 7% Interest of 6%	-0.42
Financed by			Less Redeemed Debentures	-30
7% Debentures	0		Add Original Cash & C.Assets	30
Equity Capital	76.08				16.08
Current Liabilities	10		Debentures
Total Capital	86.08		Original		30
				Less Amount to be redeemed	-30
						0
				Equity Capital
				Original E.Capital	60
				Add Retained Earnings	16.08
						76.08

From the above balance sheet, we can see that the firm has the potential to reduce its total amount owed to its investors by paying off their redeemable debentures. To make the deal sweeter, the firm has the ability to increase its equity capital from 60 million pounds to 76.08 million pounds. 

Assumptions 

1. Management costs were catered by the investment amounts. 
2. There was no taxation 
3. After the investment period, all the returns will be earned as planned with no deviations

2. Balance sheet after actual returns of 12% return on fixed assets and 15% on its projects 

Projected Balance Sheet After Investing
Assets		GB ‘000,000	Calculations
Net Fixed Assets	70		Cash&Current Assets	GB’000,000
Cash &Current Assets	12.585		ROA	0.12*70	8.4
Total Assets	82.585		ROI	0.15*30	4.5
				Less 7% Interest of 4.5%	-0.315
Financed by			Less Redeemed Debentures	-30
7% Debentures	0		Add Original Cash & C.Assets	30
Equity Capital	72.585				12.585
Current Liabilities	10		Debentures
Total Capital	82.585		Original		30
				Less Amount to be redeemed	-30
						0
				Equity Capital
				Original E.Capital	60
				Add Retained Earnings	12.585
						72.585

Task 2

Principle of Contract Costing

Contracts are essentially an agreement between a contractee and a contractor to undertake a certain specific task for a consideration within a specified time period and terms. Contracts have commencement dates and completion dates which are useful in the calculation of costs and amount owed to the contractor, or the reverse if there is a breach of contract. In contract costing, it is important to note that direct costs form bulk of the costs. Contracts are costed depending on the kind of contract they are. We have the following types of contracts. First, Fixed price contracts where a price for the contract is agreed upon by both parties before commencement of the contract. Second, the fixed price contract which has a clause for price change. Third, the cost plus contract where profits for the contractor are determined as a percentage of the costs incurred. 

To properly account for costs and revenues for a given contract, two methods can be adopted. First, the architect’s/engineer’s certificate method or two, the work in progress method. With the architect’s certificate method, costs are broken down into direct expenses, indirect expenses, overheads and costs of extra work. Using the above mentioned expense heads, an engineer or an architect can authoritatively give the value of work certified and the value of work not certified. The contractor is then paid for the work certified. In this case, work not certified is treated as an expense. Second is the work in progress method.  This method allows the contractor to be paid depending on the percentage of the work completed. Work in progress in this method is assumed to be the work not certified. 

Attributable Profits 

Attributable Profit =Contract Price-Costs Incurred

Calculation of Costs Incurred

Therefore, Attributable Profit will be calculated as follows. 

      = (3,500,000)/3-279,700

      = 1,166,667-279,700

      = 886,967

Value of Work Certified 

Value of Work Certified=Total Costs Incurred- Work Not yet Certified

  = 279,700-27,000

     =257,700

Contract Cost Statement

Mega Construction Plc 

Contract Cost Statement 

Submitted by,

Name

Position 

Contact 

For Contract Number XXXX, 

Contract Period Covered, 1 March 2011 to 28 February 2012.

On this day 30 of September 2017.

The Contract 

This contract was entered into by Mega Construction Plc (contractor) and XXX (contractee). The contract value is 3,500,000 British Pounds. The contract commenced 1 March 2011 and will come to a halt on 28 February 2014 unless otherwise agreed. 

Pricing Methods 

In line with Regulation 22(2) (K), this contract adopted a fixed pricing method. The contract cost were determined, agreed upon and set at 3,500,000 British Pounds. 

Annual Profile of Costs 

Below is a table showing how Mega Construction Plc categorized costs and the specific amounts that matched each expenditure head.