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Presentation on Contract Costing

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Contract Costing

Contract costing is used to find out the cost and profit of each contract for a given period.

Contract costing applies where the work is undertaken to customer’s special requirement which lasts for longer duration

Contract costing enables the contractor to ascertain and control the cost of each job or contract.

Ex :- construction of road, building, dams, bridges, and other civil engineering works

con t rac t. Ex : - cons t ruc ti on o f roa d

Important Terms used in Contract costing

Contractor – the person who undertakes the contract

Contractee – the person for whom contract is undertaken

Contract Price - is the amount agreed to be paid by the contractee to the contractor as consideration for the job done

Work Certified – Contractor receives amount payment against the value of work completed at specific interval. Certificate is given by architect

Retention Money –the amount retained by the contractee so as to safeguard his interest incase of future defects in work done

Work Uncertified – The work is carried out but which is not certified by architecture

Features of Contract Costing

Work is carried out at the contractee’s place. Certificate of work done has to be certified by architect or engineer. There may be penalty clause for late completion and bonus clause for early completion. Material consumed , labor, overheads & depreciation are debited to contract account. Contract may continue for more than one accounting period. Payroll is prepared at either the site or at central administrative office.

Recording of Contract Costs

#

Cost kind

Debit Side

Credit Side

1.

Materials

Required for a

Returned under the

specific contract.

materials returned note. (Contract a/c)

(Contract a/c)

-Materials transfer from one contract to another.

Contract

Contract giving the material.

receiving the material.

-Materials sold at site when not required for current use. (Difference b/w cost & sale value transferred to P & L a/c.)

Amount received.

-Value of materials that remain unutilized at the accounting period.

value of material unused or @ site

# Cost kind Debit Side Credit Side 2. Wages • Accrued or outstanding at the
#
Cost kind
Debit Side
Credit Side
2.
Wages
Accrued or
outstanding at the
end of period
(Contract a/c.)
3.
Pl
t
-Purchased for a particular contract
and exhausted at site.
an
an
d M
ac
hi
nery
• Total cost.
-Sold at site on completion of the
contract.
• Amount for
which sold
-If not sold .
• Value depreciated .
-If taken on hire.
Hire charges with
no depreciation.
 

Cost kind

Debit

Credit

#

     

4.

Sub-Contract -Payments made. -Materials issued.

Direct charge to the main contract with no break-up.

 

-Heavy tools and Equipments supplied on a rental basis.

Depreciation charged.

5.

Expenses Other than material and wages charged to individual contracts.

Direct or indirect

Profit on Incomplete Contracts

Profit should be considered in respect of work certified only

CONTRACT

PROFIT

 

COMPLETION

CALCULATION

 

<

25 %

No profit should be computed and credited to the profit and loss account

 

1/3 * Notional Profit *

> 25 % and < 50 %

(Cas

h

i

d

rece ve /Wor

k

Certified )

 

N

i

ot ona

f date – cost of work not yet certified)

l

l P

fi

V

k

ifi

ro

t =

a ue o wor

cert

e

d

f

k

- (cost o wor

to

N i ot ona f date – cost of work not yet certified) l l P
CONTRACT PROFIT CALCULATION COMPLETION
CONTRACT
PROFIT CALCULATION
COMPLETION

Between 50 % and 90 %

2/3 * Notional Profit * ( Cash Received/Work Certified )

90

%

or

>

90

%

Estimated Profit * ( Work Certified/Contract Price )

Estimated Profit * ( Cash Received/Work Certified )

Notional Profit * (Work Certified/Contract Price ) {If additional expenditure is not mentioned}

h l

T

e tota o

f l

oss ,

if

any , s

h

ou

ld

f

d

be trans erre

h

to t

e

profit and loss account by crediting the contract account

o f l oss , if any , s h ou ld f d be trans

Cost Plus Contract / Escalation Price

The practice of cost-plus contracts is adopted in the case of those contracts where the probable cost of the contracts cannot be ascertained in advance with a reasonable accuracy. These contracts are preferred when the cost of material and labour is not steady and the contract completion may take number of years. The different costs to be included in the execution of the contract are mutually agreed, so that no dispute may arise in future in this respect. Under such type of contracts, contractee is allowed to check or scrutinize the concerned books, documents and accounts. Such a contract offers a fair price to the contractee and also a reasonable profit to the contractor. The contract price here is ascertained by adding a fixed and mutually pre-decided component of profit to the total cost of the work.

Case

Bharat agency undertook a contract for Rs 500000 on 1 st July 2008. On 31 st March 2009 when contract account was closed for the year following information is made available

Particulars

Amount

Particulars

Amount

Material Issued

55000

Cost of subcontract

15000

Direct expenses

6000

Wages unpaid

2000

Site office cost

10000

Material @ site

5000

Plant

200000

Work uncertified

20000

Direct exp. Prepaid

1000

Cash received (80 % of work certified)

200000

Wages paid

18000

   

General Overhead

25 % of total wages

   

The plant was installed on 1 st day of contract and to be depreciated at 10% per annum Prepare a contract account and the balance sheet of the contractor, related to his contract on 31 st march

2009.

Solution – Contractor A/C

 

Amount

 

Amount

Dr (Expenses)

 

Cr (Income)

 

To material

55000

By Material @ site

5000

To Direct Expenses Less prepaid expenses

 

5000

By work certified

250000

To site office cost

10000

By Work Uncertified

20000

To plant Depreciation @10

15000

 

%

Wages Add unpaid wages

 

20000

 

To Subcontract

15000

 

To overhead @ 2 % of wa es

5

g

5

000

 

To Notional Profit

 

150000

 

Total

2 0000

7

Total

2 0000

7

To P&L A/C

80000

 

To WIP (Res)

70000

By Notional Profit

150000

% of work = (cash received / work certified) * 100

certified

= (200000/ 250000 ) * 100 = 80 %

Profit to be credited to P&L a/c

= (2/3) * notional profit * (cash received / work certified )

= (2/3) * 150000 * (200000/250000)

= 80000

Balance sheet

Liabilities

Amount

Asset

AdJ

Amount

P & L A/C

80000

Plant - Depreciation

200000

185000

-

15000

Outstanding

2000

Prepaid Expenses

 

1000

wages

   

Material @ site

 

5000

   

Work certified + work uncertified -Reserves - payment received

250000

0

+ 20000

-70000

-

200000

Note -Balance sheet will not match as it is only extract of information

REFERENCES

Lal, Jawahar and Srivastava, Seema (2009) Cost Accounting, India: Tata McGraw- Hill Williamson, Duncan(1996) Contract Costing Worked Examples [Online] Available at:<http://www.duncanwil.co.uk/contract.html > [Accessed 24 th November, 2010] Lakum, Ketan(2000) Contract- Costing [Online] Available

at:<http://www.scribd.com/doc/29496672/Contract-

Costin > [Accessed 24

th

November, 2010]

g

Thank You