CONTRACT COSTING

A contract is an agreement between two parties by

which one party agrees to undertake compleye a job or a piece of work
for a agreed price.The parties to a contract are contractor and
contractee.Contractor is the person who undertakes the
work.Contracteee is the person who gives the contract or for whom
work is done.

MEANING OF CONTRACT COSTING

Contract costing is aspecial form of job costing.It is a method of costing
followed by those concerns which undertake construction
work.Contract costing is also known as terminal costing.It is called so
because the preparation of contract account is terminated or closed
after the completion of the contract.

FEATURES OF CONTRACT COSTING

1. Contract costing is a method of costing followed by firms engaged
in construction work.
2. Work is undertakenas per the requirements of the customer or
the contractee.
3. A contract is a large job.It involves huge cost.
4. The work is executed at the customer’s site and not in the factory.
5. A contract takes long time for completion.Hence a contract
account covers more than one accounting year.

APPLICABILITY OF CONTRACT COSTING

The system of contract costing is adopted by builders,civil
engineers,mechanical engineering project etc.It is suitablr to business
concerns undertaking construction work,engineering project etc.

DIFFERENCE BETWEEN CONTRACT COSTING AND JOB COSTING

JOB COSTING CONTRACT COSTING

A job takes short time for
completion.
Job work is done in factory
premises.
A job is a small contract
Profit is ascertained only on
completion of the job.
The propotion of indirect cost is
high.
Selling price of a job is paid after
completing the job in full.
A contract takes long time for
completion
contract work is executed at site.
A contract is a big job.
Profit can be ascertained even if
the contract is not completed.
The propotion of indirect cost is
low.
Price is paid in installments
depending upon the progress of
work.

CONTRACT ACCOUNT
A contractor prepares two accounts namely Contract account and
Contractee account.The contractee prepares only one
account,ie,contractors account.The contractee,s account prepared by
the contractor and contractors account prepared by the contractee.On
the otherhand contract account is nominal in nature.In fact each
contract account become a profit and loss account.
 Difference between the two sides of the contract account is the profit
or loss upon the contract.If the credit side exceeds the debit side ,the d
difference is profit and viceversa
Ascertainment of profit or loss on the contract may be discussed under
two situations,completed contract and incomplete contract.

COMPLETED CONTRACTS
On completion of the contract, contract account is credited with the
contract price(contractee account is credited).A specimen of a
completed contract is given below.
Contract account
To materials Xxx by materials Xxx
returned/transferred
“ labour Xxx Xxx
materials at site
“ direct expenses Xxx Xxx
plant at site
“ overheads Xxx xxx
contractee acc
“ plants
Xxx
“ p&l account Xxx
xxx

Treatment of plant and machinery in contract account

(a) When plant is leased : The leasing charge are charged directly to
the contract.
 (b) When plant is purchased: There are two methods in
common use,they are,
First method: At the time of issue of plant to contract the contract
account is debited with the full value of the plant.
Second method: contract account is debited with an hourly rate of
depreciation for the number of hours the plant is used on the
contract. This hourly rate of depreciation is computed by divding
the total amount of depreciation and all other operating expenses
of plant by the total estimated working hours of the plant.

EXAMPLE 1
Madhu undertook a contract for constructing a building on 1st
july2020 for Sundar.The contract price is Rs.75000.He incurred the
following expenses.
Materials consumed 25000
Materials in hand 1000
Wages 35000
Direct expenses 20000
Plant purchased 10000
The contract was completed on31-3-2021. The contract price was duly
received.Provide 10% depreciation on plant and charge indirect
expenses at 20% on wages.Prepare contract account on books of madhu.
SOLUTION:
To materials purchased 26000 By materials in hand 1000
Wages 35000 Plant at site 10000
Direct expenses 20000 Less depreciation
Plants purchased 10000 750 9250
Indirect exp. 7000 Sundar(contract 75000
price)
P&l account (loss)
12750

98000 98000

Incomplete contracts
In most of the cases contracts would not be completed by the end of an
accounting period.Contracts generally takes two or more years for
completion.However, contract account should be prepared at the end of
the each year even though the contract is not finished.Suppose a
contract take three years for completion.The incomplete contract is
called work-in progress .Similiarly at the end of the second year also
contract would not be completed,but contract account should be
prepared.At this time also the unfinished contract is known as work-in
progress.
Work in progress
The work done upon an unfinished contract at the end of an
accounting year is called work in progress.It represents the contract on
which work is progressing but not yet finished.In short partly completed
contract on which work is progressing but not yet finished.
Work certified:
A contract involves large amount of expenditure.It requires long period
for completion.Hence it is normal practice to pay the contractor a certain
sum of money on account as advance at various stages of
completion.The advance is called on account of payment or progress
payment or interim payment.The architect or surveyor will issue a
certificate stating the sale value of work completed upto a specified
date.The amount so certified as completed is called work certified.

Work uncertified:
Work which has been done but not certified is called work uncertified.It
is the value of work done since certification.It is a valued cost.