Cost

System
Session (8)

Contract Pricing

‫حممود حممد بدوي‬

Mahmoud Mohamed Badwi

Contract Pricing

Contract Account
Dr. Cr.
Direct Material ×× Material returned to the stores ××
Material from stores ×× Material on site “at end” ××
Direct Labor ×× Materials stolen or destroyed ××
Overhead ×× Plant on hand ××
Direct Expenses ×× Value of work certified ××
Plant and Machinery ×× Value of work uncertified ××
Sub- contract charges ××
National or estimate profit ××
Difference between Dr. and Cr. ×× Difference between Dr. and Cr. ××

Cases to compute the potion of profit:

1. Work certified is less than ¼ (25%) of the contract price: the whole amount of the
national profit should be kept in reserve.

2. Work certified is more than ¼ (25%) but less than ½ (50%) of the contract price.

3. Work certified is more than ½ (50%) but less than 9/10 of the contract price.

4. In the case the contract as almost complete:

5. In the case of a loss on incomplete contracts, the loss should be transferred in full to
the profit and loss account, whatever is the stage of completion of the contract.

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‫ واذكر للا‬،‫صيل عيل النب من قلبك‬
Mahmoud Mohamed Badwi

Question (1):
The following expenses were incurred on an unfinished contract during the year 2018:

Materials 180,000
Wages 120,000
Other expenses 60,000
400,000 was received by the contractor, being 80% of the work certified. Work done but not
certified was 10,000.

Required:

Calculate the profit to be credited to profit, and loss account and profit kept in reserve in all
the three alternatives given below:

A. Contract Pricing is 600,000

B. Contract Pricing is 1,100,000
C. Contract Pricing is 2,400,000

Contract Account for the Year ending 31st December 2018

Dr. Cr.
Materials 180,000 Cost of work in progress
Wages 120,000 Work certified 500,000
Other expenses 60,000 Work uncertified 10,000
To notional profit 150,000
510,000 510,000

A. Contract Pricing is 600,000

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‫ واذكر للا‬،‫صيل عيل النب من قلبك‬
Mahmoud Mohamed Badwi

B. Contract Pricing is 1,100,000

C. Contract Pricing is 2,400,000

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‫ واذكر للا‬،‫صيل عيل النب من قلبك‬
Mahmoud Mohamed Badwi

Question (2):
A contract to build a residential compound was signed with a price of L.E. 120,000,000. On 31 st
December 2020, the following expenditure has been incurred:

Materials 24,000,000
Wages 32,800,000
Plant 4,000,000
Overheads 1,720,000
Cash received for the contract to 31st December 2020 was 48,000,000, 80% of the work was
certified. The value of materials in hand was 2,000,000. The depreciation on the plant is 20%
annually.

Required:

Prepare the Contract Account for the period ended 31st December 2020 and Show the amount
to be included in the Profit and Loss Account.

Solution

Contract Account for the Year ending 31st December 2020

Dr. Cr.
Materials 24,000,000 Materials in hand 2,000,000
Wages 32,800,000 Plant in hand 3,200,000
Plant 4,000,000
Cost of work in progress 60,000,000
Overheads 1,720,000

To notional profit 2,680,000

65,200,000 65,200,000

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‫ واذكر للا‬،‫صيل عيل النب من قلبك‬
Mahmoud Mohamed Badwi

Question (3):
On 28 February 2019, The Arab contractors started work on the construction of a bridge at a
contracted price of L.E 3,750,000. The Arab contractor’s financial year ended on 31st December
2019 and on that date the accounts pertaining to the contract contained the following balances:

✓ Materials issued to site 805,000

✓ Materials returned from site 70,000
✓ Wages paid 340,000
✓ Plant in use on site (at cost) 480,000
✓ Hire of plant 360,000
✓ Supervisory Staff Direct 55,000
✓ Indirect 60,000
✓ Head office charges allocated to the contract 315,000
✓ Value of work certified to 31st December 2019 200,000
✓ Cash received on work certified 1,650,000

Depreciation on plant is to be provided at the rate of 12.5% per annum on cost; L.E 10,000 is
owning for wages; Estimated value of materials on site L.E 120,000.

Required:

Prepare the Contract Account for the period ended 31st December 2019 and show the amount to
be included in the Arab contractor’s Profit and Loss.

Solution

Contract Account
Dr. Cr.
Materials issued 805,000 Materials returned 70,000
Wages paid 340,000 Plant on hand 430,000
Plant at cost 480,000 Materials on site 120,000
Plant hire 360,000
Supervision: direct 55,000 Value of work certified 2,000,000
Supervision: indirect 60,000
Head office charges 315,000 Cost of work uncertified 200,000
Wages 10,000
National Profit 395,000

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‫ واذكر للا‬،‫صيل عيل النب من قلبك‬
Mahmoud Mohamed Badwi

Question (4):
A construction contract has a price of L.E 20,000,000. On 31st December 2018, 90% of the
work had been completed and certified by the architects. The costs incurred up to 31st
December 2018 on this project amounted to L.E 16,000,000. It was estimated that another L.E
800,000 would have to be spent further to complete the project. The contract paid 80% of the
value of the work certified.

Required:

Calculate the amount of profit to be taken to the Profit and Loss Account for the year ending
31st December 2018.

Solution

Contract Price 20,000,000

Less: Total Estimated Cost:
• Costs to date 16,000,000
• Costs to be incurred 800,000 (16,800,000)
Total Estimated Profit 3,200,000

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‫ واذكر للا‬،‫صيل عيل النب من قلبك‬