Recording Cost on Contract or Costing Procedure

Contract Account

(1) Materials:
Contract Account is debited
Bulk of materials are purchased Materials obtained from contractor's central stores Materials transferred from one contract to another contract Value of materials remaining unutilized on site

Contract Account is credited

Materials returned Sale of materials at site Materials transferred to other contracts Materials stolen or destroyed by fire

Any profit or loss on materials account is transferred to the Profit and Loss Account
Sale price is different from the cost price Resulting from the sale of materials at site

2.Labour 3.Direct Expenses 4.Overhead Cost 5.Plant and Machinery

6. Sub-Contracts 7. Work in Progress:

Work Certified Work Uncertified

Treatment of Profits or Loss on Contract Alc:

(A) Profit or Loss on Incomplete Contracts
Completion of Contract is Less than 25% Completion of Contract is upto 25% or more but Less than 50% 1/3 x Notional profit x Cash received Work certified Completion of Contract is upto 50% or more but Less than 90% 2/3 x Notional profit x Cash received Work certified

Completion of Contract is upto 90% or more than 90%, i.e., it is nearing completion (a) Estimated Profit x Work certified Contract Price
(b) Estimated Profit x Cash received Contract Price

(B) Profits or Loss on Completed Contracts

The overall profit or loss on the contract is transferred to the Profit and Loss Account.

Escalation Clause:
Provided as safeguard against any changes in price or utilization of material and labour Contract price would be enhanced by an agreed formula or factor, in the event of a specified contingency happening

Cost-Plus Contract:
Actual cost of manufacturing plus a stipulated profit. The profit to be added may be a fixed amount or it may be a stipulated percentage of cost.

BALANCE SHEET

Contractee's Account
When the various instalments of contract price is received from the contractee, the following entry is passed: Cash A/c Dr. To contractee's A/c When the contract account is fully completed, the following entry is passed: Contractee's A/c Dr. To contract A/c