Attributable Profit
Attributable profit represents the share of the total projected profit from a long-term contract that corresponds to the portion of work completed by a specific accounting date. This calculation takes into account estimated costs for remedial work, maintenance, and other non-recoverable expenses.
Examples
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Construction Project:
- A construction company is working on a multi-year infrastructure project. At the end of the annual accounting period, the project is 60% complete. The total estimated profit for the project is $1,000,000, with anticipated remedial and maintenance costs of $50,000. The attributable profit for the completed part of the project would be calculated by considering the percentage of completion and subtracting the estimated costs.
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Software Development:
- A software firm is hired to develop a custom software solution over three years. By the end of the first year, 40% of the work is done. If the total estimated profit is $300,000 and unforeseen future non-recoverable costs are expected to be $20,000, the attributable profit reflecting the completed work at year-end will be determined after accounting for these non-recoverable costs.
Frequently Asked Questions (FAQs)
What is the significance of attributable profit in long-term contracts?
Attributable profit helps in recognizing the fair share of a project’s profit proportionate to the amount of work completed over a specific period, ensuring accurate profit reporting and financial transparency.
How is attributable profit different from gross profit?
Gross profit is the revenue remaining after deducting the cost of goods sold without considering long-term estimations. Attributable profit, on the other hand, pertains to long-term contracts and takes into consideration future remedial, maintenance, and non-recoverable costs.
Can attributable profit be a negative number?
If the estimated costs become excessively high and surpass the allocated profit for the completed work, the attributable profit could potentially be negative, reflecting a loss on that portion of the project.
How frequently should attributable profit be calculated?
Attributable profit should be updated at every accounting period during the lifecycle of the long-term contract, ensuring the financial statements accurately reflect the progress and profitability of the contract.
Related Terms
- Long-term Contract: Agreements spanning over multiple accounting periods, requiring the assessment of profit and loss at different stages of completion.
- Maintenance Costs: Ongoing expenses incurred for the upkeep of assets or projects.
- Non-recoverable Costs: Expenses that cannot be reclaimed or offset by income.
- Percentage of Completion Method: An accounting principle used to determine the revenue and expenses related to long-term contracts based on the project’s level of completion.
Online References
Suggested Books for Further Studies
- “Accounting for Long-Term Contracts” by Patrick R. Delaney
- “Financial and Management Accounting” by Pauline Weetman.
Accounting Basics: “Attributable Profit” Fundamentals Quiz
### What reflects the fair share of profit in a long-term contract?
- [ ] Gross profit
- [x] Attributable profit
- [ ] Net revenue
- [ ] Operating income
> **Explanation:** Attributable profit is the portion of total estimated profit that corresponds to the work completed in a long-term contract, minus any anticipated costs.
### What type of contract typically involves the calculation of attributable profit?
- [ ] Short-term contract
- [x] Long-term contract
- [ ] Perpetual contract
- [ ] Flexible contract
> **Explanation:** Attributable profit is commonly associated with long-term contracts that span multiple accounting periods.
### What costs are considered when calculating attributable profit?
- [ ] Only fixed costs
- [x] Estimated remedial, maintenance, and non-recoverable costs
- [ ] Only variable costs
- [ ] Cost of goods sold
> **Explanation:** When calculating attributable profit, estimated remedial, maintenance, and other non-recoverable costs are factored into the calculation.
### Can attributable profit be updated over time?
- [x] Yes, it should be updated at regular accounting periods.
- [ ] No, it is only calculated once at the start of the project.
- [ ] Yes, but only at the project’s completion.
- [ ] No, it does not change.
> **Explanation:** Attributable profit should be updated at each accounting period throughout the project to reflect the fair share of profit based on work completed to date.
### Why is it important to calculate attributable profit?
- [ ] To estimate future project expenses.
- [ ] To forecast cash flows.
- [x] To ensure accurate profit reporting for the completed portion of work.
- [ ] To increase company profits.
> **Explanation:** Calculating attributable profit ensures the accurate reporting of profits based on the completed portion of work, facilitating financial transparency.
### What happens if the estimated costs surpass the allocated profit for the completed work?
- [ ] Attributable profit remains positive.
- [ ] Attributable profit is unaffected.
- [ ] The project is deemed unprofitable.
- [x] Attributable profit can be negative.
> **Explanation:** If the estimated costs exceed the allocated profit for the completed portion of the work, attributable profit can turn negative, indicating a potential loss.
### How does the percentage of completion method relate to attributable profit?
- [ ] It is unrelated to attributable profit.
- [ ] It provides an alternative profit estimation.
- [x] It helps determine the portion of profit attributable to completed work.
- [ ] It focuses solely on project expenses.
> **Explanation:** The percentage of completion method aids in determining the share of profit attributable to the completed work during the project's lifecycle.
### Which standard practice uses the concept of attributable profit?
- [ ] Historical cost accounting
- [ ] Cash basis accounting
- [ ] Fair value accounting
- [x] Percentage of completion method
> **Explanation:** The percentage of completion method uses the concept of attributable profit to estimate the fair share of profit reflecting completed work stages.
### Attributable profit should fairly reflect what aspect?
- [ ] Future costs
- [x] The portion of work completed at a specified date
- [ ] Total estimated project value
- [ ] Depreciation value
> **Explanation:** Attributable profit should fairly reflect the profit related to the portion of work completed by a specific accounting date, minus estimated non-recoverable costs.
### What is a typical characteristic of attributable profit?
- [ ] It encompasses only tangible assets.
- [ ] It relates solely to short-term projects.
- [x] It accounts for future remedial and maintenance costs.
- [ ] It is calculated only once at project completion.
> **Explanation:** A typical attribute of attributable profit is that it includes future remedial and maintenance costs providing a realistic measure of project profitability.
Thank you for exploring attributable profit and testing your knowledge on this crucial accounting concept. Keep enhancing your financial understanding and stay competitive!
