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Meaning of Contract A contract is nothing but a big job having following features: 1. A high price of thousands or lakhs of rupees. 2. The period taken for completion may be many months or even years. 3. The actual work may be done at a site away from the main office of the contractor. Contract Costing Contract costing is the method of costing used to find out the cost and profit of each contract for a given period. Contract costing which applies where the work is undertaken to customer’s special requirement and order which is of a longer duration and which is carried out at site which is different from contractor’s premises. Contract costing enables the contractor to ascertain and control the cost of each job or contract. Contract costing is applicable when the work is usually of constructional nature for e.g. construction of road, building, dams, erection of factories, bridges, and other civil engineering works, the technique of contract costing is preferable.

Important terms under contract costing 1. Contractor: Contractor is the person who undertakes the contract (job). 2. Contractee: Contractee is the person for whom contract job is undertaken. 3. Contract price: Contract price is the amount agreed to be paid by the contractee to the contractor as consideration for the job done. The contract price may be payable in lump-sum when work is completed. Alternatively, the amount may be paid in installments as the work progresses. The amount of each installment would depend on the amount of work done and certified by the architects. 4. Work Certified: In the case of large contract, normally the contractor receives on account payment against the value of the work completed at specific intervals. Work certified is that part of work completed for which the contractor gets the certificate of the architect. In the case of large contract, the contractor would expect the contractee to make a payment of the contract price in installments. He therefore, sends a part bill to the contractee as and when a portion of the work is completed. An architect, appoint in terms of the contract, between the contractor and contractee, scrutinizes the part bill, he certifies the work done for the purpose of payment. 5. Work Uncertified: Work uncertified is that cost of work done which relates to the period between the dates of work certified and accounting year ending. At the end of the accounting period, not all work done would have been certified by the architect. Compiled by: GOURAV KUMAR JASHNANI (B.Com, CA FINAL, CS FINAL) 9926955326, 94071-21248, 243, SUNDARAM COPLEX, BHANWERKUAN MAIN ROAD, INDORE Page 1

He keeps certain amount till contract is complete. 94071-21248. XXX XXX Particulars By Materials Lost (Cost) By materials sold (Cost) By Materials returned to stores By Materials transferred to XXX other contract XXX By Plant and machinery (WDV) XXX By plant Lost (Cost) By plant sold (Cost) By Closing stock of material By Work-in-progress: Work Certified Work Uncertified XXX XXX XXX By Notional Profit XXX XXX XXX XXX XXX Rs. 7. This amount so kept is by contractee is called retention money. SUNDARAM COPLEX. BHANWERKUAN MAIN ROAD. INDORE Page 2 .Com. Escalation Clause: This is to safeguard against likely change in price of cost elements rise by and certain % over the prices prevailing at the time of tendering the contractee has to bear the cost.EDU-CARE PROFESSIONAL ACADEMY 6. CA FINAL. XXX XXX To Labour (Wages) To Wages outstanding To Direct Expenses To Indirect Expenses To Establishment Charges XXX To Plant & Machinery (purchase XXX price/Book value) XXX To Notional Profit XXX XXXX To Profit & loss A/c To Reserve For Contingency XXX XXX XXX Compiled by: GOURAV KUMAR JASHNANI (B. CS FINAL) 9926955326. Performa of Contract Account Contract A/c For the year ended ………… Particulars To Material Bought To Materials Issued From Stores Material contract transfer to other XXX XXX XXX XXX XXX Rs. 243. The contractee does not pay full amount of the value of work certified. Retention Money: Retention money is that part of work certified which is retained by the contractee so as to safeguard his interest in case of future defects in the work done.

Thus. 90% or more) 100 % i.EDU-CARE PROFESSIONAL ACADEMY Two possible accounting methods for plant and machine: 1. Extent or Work Completed: 0 to 24 % 25 % or more but less than 49 % 50 % or more but less than 90% Profit to be Considered: No profit is transferred to P&L a/c 1/3rd of notional profit transferred to P&L a/c & remaining in reserves 2/3rd of notional profit is transferred to P&L a/c & remaining in reserves. when entire contract is complete. BHANWERKUAN MAIN ROAD. When contract is almost complete (i. whenever there is a loss. There is no need to keep ant reserve and the entire profit may be credited to the P&L A/c Note: 1 Find amount of profit to be transferred to profit & loss account based on % of completion of work: Profit to be transferred to P&L A/c = Notional Profit X 1 /3 or 2/3 X Cash Received Work Certified Note: 2 in any case.Com. INDORE Page 3 . 243. This is in accordance with the basic convention of conservation followed by accountants.e. Compiled by: GOURAV KUMAR JASHNANI (B. If the plant is purchased specifically for a particular contract: In this situation the cost of plant (original cost) is debited to the contract account and depreciated value (WDV) of plant is credited at the end of accounting period. 2. % of work Certified = Amount of work certified X 100 Total contract price Step-2 Calculate the amount to be transferred to profit and loss account The standard rules for transferring the amount of such profit to P & L A/c in relation to the extent of work completed. Determine the amount to be transferred to profit & loss account Step-1 Find the extent of work certified: The value of work certified is to compared with the total contract price to ascertain the % of the work completed.e. If Plant is already in stock (Commonly used): In this situation a reasonable amount of depreciation is charged to contract account as an expense. CS FINAL) 9926955326. 94071-21248. CA FINAL. SUNDARAM COPLEX. It should be entirely debited to the profit and loss account irrespective of the stage of completion.

000 2.200 21.000 Page 4 Compiled by: GOURAV KUMAR JASHNANI (B. CS FINAL) 9926955326. The following is the summarized record as on December 31. 103 commenced from 1 st January 2009.) 60. 243.000 50. SUNDARAM COPLEX. Particulars Materials purchased directly Materials supplied from stores Wages Expenses directly chargeable Indirect expenses Plant installed Total contract price Value of plant at site on Dec.000 65.940 3. 2009 Prepare contract account from the above information.000 80.000 7.000 3000 1. BHANWERKUAN MAIN ROAD. CA FINAL. From the information given below.Com. 80 which was commenced on January 1.000 900 3. INDORE .000 6.440 2. The following is summarized record relating to Contract no.000 48.000 54.61.000 18.000 4.500 7. Amount (Rs.000 60. prepare contract account and work in progress account: Particulars Material sent to site Labour engaged at site Plant issued at cost Direct expenses Establishment charges Materials returned to store Work certified Work uncertified Materials in hand Wages accrued Cash received Depreciation on plant Amount (Rs.000 600 1. 2009 and completed during the year. 105 Materials purchased Wages Outstanding wages Plant purchased for this contract Indirect charges Outstanding indirect charges Amount (Rs.000 8. 31. 2009 Materials at site in Dec.) 86.700 5.700 2. relating to an incomplete contract.) 12.000 12.EDU-CARE PROFESSIONAL ACADEMY Practical Problems: 1. 94071-21248.000 10.90. 2009 of all transactions relating to Contract No. 31.000 10.000 2. Particulars Materials issued from stores Materials transferred from Contract no.

5.00. 1250.000 2.) 40. Materials at site were Rs. SUNDARAM COPLEX.000 15. 243.00.000 which is 90% of work certified. CA FINAL. 16. 6. The contract is not completed.000 50.000.000 The contract price was Rs.000 11.000 50.000 50.000 1. He maintains a separate record for each contract. Material at site is Rs. 1500 were stolen.15. Materials worth Rs. From the records for the year ending 31-12-2009 prepare contract account and find the amount transferred to profit and loss account. 4.000 Prepare the contract a/c assuming contract price to be Rs. Materials costing Rs. 96 were Rs. 2500 were returned to stores.000. 6000 and plant costing Rs. Depreciation for machinery was Rs. 94071-21248.000. 2600. 5250 and Rs.000 1. CS FINAL) 9926955326.20. 4000 and plant costing Rs. INDORE Page 5 .000 54. 1000 were sold for Rs. Open Contract account and found out the cost of work done on the contract.50. 4000 respectively.000 24. A has undertaken several contract works.000 and showing profit to be taken to P&L a/c.) 1.000 60. Compiled by: GOURAV KUMAR JASHNANI (B. 4200 were sold for Rs.500 were destroyed by fire.60.EDU-CARE PROFESSIONAL ACADEMY Material worth Rs. Mr.44.000 2. Particulars Materials Wages Other expenses Plant at cost Work certified Work not certified Materials in hand on 31st Dec. 500 and plant costing Rs. 6. 2000 and plant costing Rs. 2009 Plant at cost Cash received from contractee Materials returned to stores Amount (Rs.000 43. Materials costing Rs. Cash received up to 31-12-2009 was Rs.00. BHANWERKUAN MAIN ROAD. Provide depreciation on plant @ 10%.000 1.80.Com. Particulars Direct purchase of material Materials issued from stores Wages Direct expenses Machinery purchased Establishment charges Amount (Rs. 16. Following expenses were incurred by a contractor on a contract which he started on 1 st January 2009. Materials and plant transferred to contract no.

12. SUNDARAM COPLEX.000 40. 12.500 50.500 1. The plant had undergone 20% depreciation. [MBA 2012] 8.000 80% of work certified On 31st December 2011 plant and materials at site were valued Rs. On January. 10.500 Compiled by: GOURAV KUMAR JASHNANI (B. Prepare contract account work in progress account and ascertain the amount of profit which can reasonably be credited to profit and loss account. 4.EDU-CARE PROFESSIONAL ACADEMY 6.000 respectively. Following are the expenses on a contract for Rs.000 Cash received on account of the contract on 31 st Dec.00.700 1. 2009was Rs. Prepare contract account. M/S dhirendra jain & company if a firm of government contractors.000. 5. 2011 sharma and sons undertook a contract for Rs. CS FINAL) 9926955326.000 17.000 20.000 40.800 2.000on 1st April.500 20.200 30. Particulars Materials Wages Plant Overheads Work uncertified Amount (Rs.00. 2009: Particulars Material purchased and sent directly at the site Materials issued from stores Plant issued and debited to the contract Wages paid Wages outstanding Office and administration expenses Amount (Rs.000 14. 5.80.000 and incurred the following expenses during the year: Particulars Materials consumed Labour Outstanding Labour Direct expenses Indirect expenses Plant issued Establishment charges Work certified Work uncertified Cash received Amount (Rs. [MBA 2011] 7. BHANWERKUAN MAIN ROAD.000 being 80% of work certified.28. INDORE Page 6 .) 2.00.000 3. The value of materials in hand was Rs.000 65.) 50.000 30. The firm took a contract for Rs. 243.40. CA FINAL.) 62.000 commenced in January 2009. 94071-21248. 2008 and the following expenses were incurred till 31st march.000 and Rs.500 10. 25.Com.200 8.50.000 15.

2009) Accrued wages (as on 31st March. 2009 plant costing Rs. Reserve 1/4th of the profit received.) 51.66.100 1.000 were destroyed due to fire occurred at site.000 being 80% of the work certified.000. plant which cost Rs.) 5.000 24.000 2. Prepare contract account in the books of M/s dhirendra Jain & company. 2009) Accrued direct expenses Value of plant (as revalued on 31st March. [MBA 2010] 9. the following was the expenditure on a contract for Rs. 2009) Amount (Rs. Payment of Rs. INDORE Page 7 .00.90. 243. Cash received up to 31st March.330 88. Materials valued Rs. 1. 2.000 5. the cost of work done but uncertified was Rs. The cost of work done but not certified was Rs. The following details are available from the books of accounts (for the year ended March 31. Of the plant and materials charged to the contract. 1. 2.00.160 1.300 were in hand on site.000 Cash received account to 31st March 2010 amounted Rs. A firm of building contractors began to trade on 1st April.10. Charge depreciation @ 10% on plant.200 11. Charge 15% depreciation on plant reserve 1/3 of the profit received and prepare a contract account from the above particulars.000 and materials costing Rs.000 and plant costing Rs.000 not found suitable for the contract and returned to stores.000.000 15.00. 3. BHANWERKUAN MAIN ROAD. 5.000.000 12. 9. 15. 8.28. 3.000 31.000 returned to stores and the material costing Rs. CS FINAL) 9926955326. CA FINAL. 94071-21248. 5. On 31st March. 13.000. 10. transfer 3/4th of profit received to profit and loss account.000 has been received from the contractee. 5. Particulars Materials issued to a contract Plant used for contract Wages incurred Other expenses incurred Amount (Rs. 2009 amounted to Rs.800 4. 5. 2009. 9. Materials at site were valued at Rs.Com. Compiled by: GOURAV KUMAR JASHNANI (B. plant which cost Rs.EDU-CARE PROFESSIONAL ACADEMY Material worth Rs.000. 2.500 were lost.000 were sold for Rs.000 being 75% of work certified.11. 2.000 The contract price agreed upon with the contractee is Rs.120 10. SUNDARAM COPLEX.000 and materials which cost Rs.000 29.000 was returned to stores. 113) he has undertaken for a manufacturing organization: Particulars Material sent to site Labor engaged in site Cost of plant installed at site Direct expenses Establishment expenses Materials returned to stores Work certified Cost of work not certified Materials in hand (as on 31st March.000 81. 2009) of a contractor with respect to a particular contract (No. On 31st March. 6.70.

520 1.000 of which of 75% was received in cash. plant at site valued at Rs. You are required to prepare Contract Account without calculating profit. 113. 50.800 13. The value of loose-tools and stores returned was Rs.000 1. The following particulars relate to a contract undertaken by a firm of engineers on 1st January 2009 Particulars Materials sent to site Labour engaged on site Plant installed at cost Direct expenditure Establishment charges Materials returned to stores Cash received from contractee Cost of work not certified Materials in hand on 31st December 2009 Value of plant at 31st December 2009 Amount (Rs.Com.52. 243. Write up contract Account from the following particulars: Direct materials Special plant Wages Loose-tools Stores issued Cost of tractor: Running materials Wages of driver Other direct charges 19.480.320 On 31st Dec. 12.100 and Rs. You are required to provide for administrative expenses at the rate of 10% of total works cost of the contract. 445 respectively. 250000. 11.000 2. 94071-21248.000 The contract price has been agreed at Rs.) 85. CA FINAL. computing and incorporating in the said account. CS FINAL) 9926955326. SUNDARAM COPLEX.100 1.760 1. 1. Cash received from the Contractee was 80% of work certified. 10.000 11. BHANWERKUAN MAIN ROAD.200 1. Compiled by: GOURAV KUMAR JASHNANI (B.000 1.000 75. the profit to be taken to the Profit and Loss Account for the year ended 31st March 2009. INDORE Page 8 .000 3.800 8.000 5.EDU-CARE PROFESSIONAL ACADEMY You are required to prepare the Contract Account No.650 3. Value of work certified on 31st Dec.000 1.000 and the depreciation on it was to be charged to this contract Rs. 375.000 15. The value of tractor was Rs. amounted to Rs. 7.

94071-21248. 2009 was for Rs.330 19.400 Special plant 18.040 Loose tools 3.a. 101.a.200 4. The value of tractor was Rs.40.260 and Rs. the work being certified up to 30th June 2009.EDU-CARE PROFESSIONAL ACADEMY 13.16.) 1. The contract price was Rs.2. Rs. CS FINAL) 9926955326. on original cost.000 and the amount certified by the engineer after deduction of 20% retention money was Rs.540 Other direct charges 2. CA FINAL.200 1. A material at site on 30th June 2009 was Rs.49. Etc 4. 6. BHANWERKUAN MAIN ROAD.00. The following details relate to contract no. 123 undertaken by a firm of builders: Particulars Bricks and marbles purchased Materials from stores Wooden doors windows etc.560 The contract was completed in 26 weeks at the end of which plant was returned subject to depreciation at 15% p. 243. 14. 2. The value of loose tools and stores returned were Rs.560 Expenses of tractor: Running materials 3. The following information relates to contract No.000. Prepare the contract account. 125000.600 25. Compiled by: GOURAV KUMAR JASHNANI (B. SUNDARAM COPLEX. INDORE Page 9 .400 Stores issued 6. which commenced on 1st February. 40.600 Direct wages 24.Com. Direct materials 45.400 The contract.000 7.050 17.500 Wages of drivers. 1.200. 840 respectively. Iron steel purchased Labour Sundry expenses Portion of supervision charges Amount (Rs.000 and depreciation was to be charged to this contract at 20% p. Administration expenses at 10% on total works cost. Prepare contract account showing profit or loss to be taken to P/L account.

Rs.00.000 36.000 10.000 30.80. BHANWERKUAN MAIN ROAD.000 16.600 420 Cash received 30.000 54.000 Contract-II Rs.200 2.600 4. INDORE Page 10 . Compiled by: GOURAV KUMAR JASHNANI (B. SUNDARAM COPLEX. From the following information.000 4. The position of contracts on 30th September 2010 was as follows: Particulars Contract price Materials Wages paid Other expenses Plant at site Unused materials at site Wages payable Other expenses due Work certified Cash received Work completed but not yet certified Contract-I Rs.400 Materials in hand 800 800 400 Wages accrued 800 800 360 Work certified 40.00. 27.000 60.000 9. 243.400 Depreciation is to be charged on plant @ 10% which was installed on the opening date of the contract in each case. Modern construction Ltd.000 28.000 16.00.00. prepare contract account in tabular form and show how these figures appear in the balance sheet as on 31st December.000 12. 60.000 5.80. CS FINAL) 9926955326.000 1.60.000 60.000 5. had taken two contracts on 1 st October.00.000 7. CA FINAL.000 3.000 22.50.200 1.400 11.000 90.50.000 3.000 60.000 11.200 Work uncertified 1.Com.400 2.000 54. 94071-21248.000 22. 2009.000 80.000 40.000 24. Contract Price 80. 16. Prepare the contract accounts in respect of each work showing the notional profit and also the profit transferred to profit and loss account.000 Wages 22.000 Raw Materials General expenses 800 560 200 Plant installed 4. Rs.EDU-CARE PROFESSIONAL ACADEMY 15. 2009: Contract A B C Commencement 1-1-2009 1-7-2009 1-10-2009 Rs.000 32.000 Particulars If the plant at site to be depreciated @ 10%.