COST ACCOUNTING
INTRODUCTION TO COST ACCOUNTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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No profit transferred
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Notional Profit x 1/3 x ℎ
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Notional Profit x 2/3 x ℎ
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Estimated profit x
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Detailed explanation-1: -The balance amount is treated as reserve. Thus, profit to be transferred to Profit and Loss Account is computed by the following formula: Transfer to P&L A/c = Notional profit × 1/3 Alternatively, a more common practice is to further reduce this amount by the cash ratio. Cash received Work certified Page 6 5.
Detailed explanation-2: -Notional Profit: This is the actual profit earned by the contractor on completion of a project. It is calculated by deducting the cost of work certified from the value of work certified.
Detailed explanation-3: -NOTIONAL PROFIT It represents the difference between the value of work certified and cost of work certified. It is always calculated for each and every year of the contract and the amount of profit or loss of every contract is transferred to the company’s Costing Profit & Loss A/c.
Detailed explanation-4: -Notional profit is an estimate of earnings primarily used in the building and construction industry. It is used to smooth out fluctuations in reported revenue due to contracts that take a long time to complete.