Some business companies are related with construction activities such as hotel, school, road, bridge, condo, flat, building construction etc.
In practice for simple method, Cost of construction = material cost + labour cost + overhead cost=specific cost + common cost
Each cost of construction may have specific cost and common cost. Specific cost for specific project will not be allocated while common cost will be absorbed ( allocated) between common projects.
Example
Your company constructs two roads: A and B. There are specific cost and common cost for each project.
The following costs are directly allocated (specific costs) for each road:
| Costs | Road A | Road B |
| Materials | $100,000 | $200,000 |
| Labour | $20,000 | $30,000 |
| Other Costs for roads | $10,000 | $20,000 |
| Total Cost | $130,000 | $250,000 |
The following costs are common cost for two roads:
1. Salary for site manager of $5,000, but he spent time with Road B 70% while Road A 30%.The following costs are common expenses for roads:
2. Company rents excavators of $12,000, but these excavators are used for Road B 60% while Road A 40%.
3. Depreciation expenses for other heavy construction equipment of $40,000 are absorbed for Road B 60% while Road A 40%.
Required:
1. Calculate total cost for Road A
2. Calculate total cost for Road B
Solution
Cost for each cost = material + labour + overhead = specific cost + common cost
Road A = 130,000 + 5,000 x 30% + 12,000 x 40% + 40,000 x 40% =$152,300
Road B = 250,000 + 5,000 x 70% + 12,000 x 60% + 40,000 x 60% =$284,700