COST ACCOUNTING – I

Module VII : Contract Costing

Example 1 :

The following are the particulars pertaining to a contract which has begun on January 1,
2014:

Contract Price 5,00,000

Machinery 30,000
Materials sent to site 1,70,600
Wages paid 1,48,750
Direct Expenses 6,330
Outstanding wages 5,380
Uncertified work 9,000
Overheads incurred 8,240
Material returned 1,600
Materials on hand (31-12-14) 3,700
Machinery on hand (31-12-14) 22,000
Value of work certified 3,90,000
Cash received 3,51,000

Prepare the Contract account for the year 2014 showing the amount of profit that may be
taken to the credit of Profit & Loss account of the year. Also show the amount of WIP as it
would appear in the balance sheet of the year.

Example 2 : (CW)

Modern contractors have undertaken the following two contract on January 1, 2015.

Particulars Contract A Contract B

Material sent to sites 85,349 73,267
Labour engaged on sites 74,375 68,523
Plants installed at sites at cost 15,000 12,500
Direct Expenditure 3,167 2,859
Establishment charges 4,126 3,852
Materials returned to store 549 632
Work certified 1,95,000 1,45,000
Cost of work not certified 4,500 3,000
Materials in hand on Dec 31, 2015 1,883 1,736
Wages accrued on Dec 31, 2015 2,400 2,100
Direct expenditure accrued on Dec 31, 2015 240 180
Value of plant on Dec 31, 2015 11,000 9,500
The contract prices have been agreed at Rs. 2,50,000 for contract A and Rs. 2,00,000 for
contract B. Cash has been received from the contractees as follows:

Contract A – Rs. 1,80,000 and Contract B – Rs. 1,40,000.

Prepare Contract Accounts, and show how the WIP shall appear in the balance sheet of the
contractor.

Example 3 :

Alcon Construction Company Ltd. Commenced its business of construction on 1-1-14. The
trial balance as on 31-12-14 showed the following balances :

Rs. Rs.
Paid up share capital -- 1,00,000
Cash recd on account of contract (80% work -- 1,20,000
certified)
Land and Buildings 30,000 --
Machinery at cost (75% at site) 40,000 --
Bank 4,000 --
Materials sent to site 40,000 --
Direct labour at site 55,000 --
Expenses at site 2,000 --
Lorries and Vehicles 30,000 --
Furniture 1,000 --
Office Equipment 10,000 --
Postage and Telegrams 500 --
Office Expenses 2,000 --
Rates and taxes 3,000 --
Fuel and Power 2,500 --
Total 2,20,000 2,20,000

The contract price is Rs. 3,00,000 and work certified is Rs. 1,50,000. The work completed
since certification is estimated at Rs. 1,000 (at cost). Machinery costing Rs. 2,000 was
returned to stores at the end of the year. Stock of material at site on 31-12-14 was of the
value of Rs. 5,000. Wages outstanding was Rs. 200. Depreciation on machinery was at 10%.
All expenses except office expenses and rates & taxes have been incurred for the contract.

You are required to calculate the profit from the contract and show how the work in
progress will appear in the balance sheet as on 31-12-14.

Example 4 : (HW)

The following details are available from the books of account for the year ended 31-03-16 of
a contractor with respect to a particular contract no. 113 he has undertaken for a
manufacturing organization :
 Particulars Rs.
Materials sent to site 5,11,800
Labour engaged in site 4,66,100
Cost of plant installed at site 1,00,000
Direct expenses 24,000
Establishment expenses 29,000
Materials returned to stores 2,120
Work certified 10,70,000
Cost of work not certified 31,000
Materials in hand (31-03-16) 12,220
Accrued wages (31-03-16) 11,160
Accrued direct expenses 13,300
Value of plant (as revalued on 31-03-16) 88,000
The contract price agreed upon with the contractee is Rs. 13,00,000. Payment of Rs.
9,90,000 has been received from the contractee. You are required to prepare the Contract
Account No. 113, computing and incorporating in the said account the profit to be taken to
the Profit and Loss Account for the year ended 31st March, 2016

Example 5:

The following is the trial balance of M/s. K.K. Construction Co. engaged in the execution of
contract no. 1247 for the year ending 31st December, 2015.

Particulars Rs. Rs.

Contractee’s Account (amount received) -- 3,00,000
Building 1,60,000 --
Creditors -- 72,000
Bank balance 35,000 --
Capital Account -- 5,00,000
Materials Purchased 2,00,000 --
Wages 1,80,000 --
Expenses 47,000 --
Plant 2,50,000 --
st
The work on Contract No. 1247 was commenced on 1 Jan, 2015. Out of the Materials
Purchased, materials costing Rs. 1,70,000 were sent to the site of the contract out of which
those worth Rs. 6,000 were destroyed in an accident. The wages of Rs. 1,80,000 were paid
during the year. From the above plant, a Plant costing Rs. 50,000 was used on the contract
all through the year and another plant costing Rs. 2,00,000 was used from 1 st January to 30th
September and was then returned to the store. Materials of the cost of Rs. 4,000 were at
the site on 31 Dec, 2015.

The contract was for Rs. 6,00,000 and the contractee has agreed to pay 75% of the work
certified. The work certified was 80% of the total contract work at the end of 2015.
Uncertified work was estimated at Rs. 15,000 on 31 st December, 2015. The plant is to be
depreciated at 10% for the entire year.
Prepare Contract No. 1247 Account for the year 2015 and show the Work in Progress as it
would appear in the Balance Sheet as on 31 Dec, 2015 in the books of K.K. Construction.

Example 6 : (HW)

Surya Construction Ltd. With a paid up capital of Rs. 50 lakhs undertook a contract to
construct MIG apartments. The work commenced on the contract on 1 st April, 2014. The
contract price was Rs. 60 lakhs. Cash received on account of the contract upto 31 st March,
2015 was Rs. 18 Lakh (being 90% of the work certified). Work completed but not certified
was estimated to be Rs, 1,00,000. As on March 31, 2015, material at site was estimated at
Rs. 30,000, machinery at site costing Rs. 2,00,000 was returned to stores and wages
outstanding were Rs. 5,000. Plant and Machinery at site is to be depreciated at 5%.

The following were the ledger balances (Dr.) as per trial balance as on 31 st March, 2015.

Particulars Rs.
Land and Building 23,00,000
Plant and Machinery (60% at site) 25,00,000
Furniture 60,000
Materials 14,00,000
Fuel and Power 1,25,000
Site Expenses 5,000
Office expenses 12,000
Rates and taxes 15,000
Cash at Bank 1,33,000
Wages 2,50,000

Prepare the Contract Account and show how the work in progress would appear in the
Balance Sheet.

Example 7 : (HW)

Flex Limited commenced a contract on 1-7-2014. The total contract price was Rs. 5,00,000
but Flex Limited accepted the same for Rs. 4,50,000. Actual expenditure towards the
contract till 31-12-2014 are given below :

Particulars Rs.
Materials 75,000
Labour 55,000
Plant purchased (original cost) 40,000
Misc Expenses 20,000
Plant returned to stores on 31-12-2004 at original cost 10,000
Materials at site 5,000
Work certified 2,00,000
Work uncertified 7,500
 Cash received 1,80,000

The plant is subject to annual depreciation @ 20% of original cost. The contract is likely to
be completed on 30-9-2015. You are required to prepare the contract account for the year
ended 31-12-2014. It is the policy of the company to charge depreciation on time basis.

Example 8 :

The following information relates to a building contract for Rs. 10,00,000 for two years, i.e.
2017 and 2018.

Particulars 2017 (Rs.) 2018 (Rs.)

Materials issued 3,00,000 84,000
Direct wages 2,30,000 1,05,000
Direct expenses 22,000 10,000
Indirect expenses 6,000 1,400
Work certified 7,50,000 10,00,000
Work uncertified 8,000 --
Material at site 5,000 7,000
Plant issued 14,000 2,000
Cash received from contractee 6,00,000 10,00,000

The value of plant at the end of 2017 and 2018 was Rs. 7,000 and Rs. 5,000 respectively.

Prepare (i) Contract Account for both of the years (ii) Balance sheet extract for 2017 taking
into consideration such profit for transfer to Profit and Loss Account as you think proper.

Example 9 :

The following information is related to contract No. 58. Prepare the Contract Account :

Particulars Rs.
Direct materials 4,56,000
Direct wages 2,44,000
Special Plant 1,84,000
Stores issued 60,400
Loose tools 35,600
Expenses of Tractor :
Running materials 35,000
Wages of drivers etc. 45,400
Other direct charges 25,600

The contract was completed in 26 weeks at the end of which the plant was returned subject
to depreciation at 15% p.a. on the original cost. The value of loose tools and stores returned
were Rs. 22,600 and Rs. 8,400 respectively. The value of tractor was Rs. 400,000 and
depreciation was to be charged to this contract at 20% p.a. Administration expenses at 10%
on total works cost. The contract price was Rs. 12,50,000.

Example 10 : (HW)

The Indian Construction Company undertakes large contracts. The following particulars to
contract No. 125 carried out during the year ended on 31 March, 2015 :

Particulars Rs.
Work certified by architect 1,43,000
Cost of work not certified 3,400
Plant installed at site 11,300
Value of plant on 31 March, 2015 8,200
Material sent to site 64,500
Labour 54,800
Establishment charges 3,250
Wages accrued on 31 March, 2015 1,800
Direct expenditure 2,400
Materials on hand on 31 March, 2015 1,400
Materials returned to store 400
Direct expenditure accrued on 31 March, 2015 200
Contract Price 2,00,000
Cash received from contractee 1,30,000

Prepare a Contract Account for the period ending 31 March, 2015 and find out the profit. It
is decided to transfer 2/3 of the profit on cash basis to Profit and Loss Account.

Example 11 : (HW)

The Hindustan Construction Co. Ltd. Has undertaken the construction of a bridge over River
Yamuna for a Municipal Corporation. The value of the contract is Rs. 12,50,000. Subject to a
retention of 20% until one year after the certified completion of the contract, and final
approval of the Corporation’s. engineer. The following are the details as shown in the books
on 30 June, 2015.

Particulars Rs.
Labour on site 4,05,000
Materials direct to site less returns 4,20,000
Materials from stores 81,200
Hire and use of plant (plant upkeep account) 12,100
Direct expenses 23,000
General overhead allocated to the contract 37,100
 Materials on hand June 30,2015 6,300
Wages accrued on June 30,2015 7,800
Direct expenses accrued on June 30,2015 1,600
Works not yet certified – at cost 16,500
Amount certified by the Corporation’s engineer 11,00,000
Cash received on account 8,80,000

Prepare the Contract account for the year ended 30 th June, 2015, and show how WIP would
appear in balance sheet.

Example 12 : (Escalation clause)

A contractor has entered into a long term contract at an agreed price of Rs. 1,75,000 on
April 1, 2018, subject to an escalation clause for materials and wages as spelt out in the
contract and corresponding rates as follows :

Standard Actual
Materials Qty Rate per qty Qty Rate per qty
A 5,000 kg Rs. 5.00 5,050 kg Rs. 4.80
B 3,500 kg Rs. 8.00 3,450 kg Rs. 7.90
C 2,500 litres Rs. 6.00 2,600 litres Rs. 6.60

Labour
P 2,000 hr Rs. 7.00 2,100 hr Rs. 7.20
Q 2,500 hr Rs. 7.50 2,450 hr Rs. 7.50
R 3,000 hr Rs. 6.50 3,100 hr Rs. 6.60

On March 31st, 2019, when the accounts were closed , the following details, other than
material and labour were gathered :

Particulars Rs.
General Expenses 4,000
WDV of Plant sent to site (Dep @ 5% p.a. on WDV) 60,000
Work certified 1,20,000
Work uncertified 15,000
Cash received 1,00,000

Reckoning the full actual consumption of materials and wages, the company has claimed a
final price of Rs. 1,77,360. Give your analysis of the admissible escalation claim and indicate
the final price payable. (Ans. 1,75,850)

Example 13 : (HW)
The escalation clause of a long term contract stipulates the following quantities and rates of
materials of A,B and C and the following number of labour hours of X,Y and Z and their rates
of pay. The actual are shown below :

Actual
Materials Qty (tons) Rate (Rs.) Qty (tons) Rate (Rs.)
A 5,00 50 750 45
B 1,000 30 900 35
C 20 1,000 21 1,010
Labour Hours Hourly rate (Rs.) Hours Hourly rate (Rs.)
X 4,800 2 5,500 2.25
Y 2,400 1 3,000 1.50
Z 9,600 1.50 10,000 1.50
Compute the amount of final claim so far as rate is concerned. (Ans – Rs. 1,06,500)

Example 14 : (Work Uncertified not given)

A contractor who prepares his account on 31 st December each year commenced a Contract
on 1-4-14. The following information is given on December 31, 2014.

Material charged to site – Rs. 7,10,000

Labour engaged – Rs. 9,81,000

Foreman’s Salary – Rs. 1,61,000

Plants costing 9,60,000 had been on site for 219 days. Working life is 7 years and Scrap value
is Rs. 50,000. A supervisor is paid Rs. 8,000 p.m. has devoted ¾ of his time to this contract.
Administrative expenses are R. 1,30,000. Material on hand as on 31-12-2014 is Rs. 70,000.
Some material costing Rs. 12,000 was found unsuitable and sold for Rs. 8,000.

Contract Price was Rs. 44,00,000 but it was accepted for Rs. 40 lac. On 31-12-2014, 2/3 of
Contract was completed. Architect certificate had been issued covering 50% of contract
price and Rs. 15 lakh is paid so far.

Prepare Contract Account and show how much Profit/Loss will be transferred to Profit and
Loss Account as on 31-12-2014.

Example 15 : (HW)

X Ltd. Closes its accounts on 31st December each year. The company commenced work on a
contract on 1st January, 2015. The following information relates to the contract as on 31 st
December, 2015 :

Rs.
Materials used 1,25,500
Wages 2,82,800
 Salary to foreman 40,650

A machine costing Rs. 1,30,000 had been on the site for 146 days. It’s working life is
estimated at seven years and its final scrap value at Rs. 7,500. A supervisor who is paid Rs.
4,000 per month has devoted half of his time to this contract. Other expenses and
administration charges amounted to Rs. 68,250. Materials at site at the end of the year cost
Rs. 17,700. The contract price is Rs. 10 lakhs. On 31 st December, 2015, two thirds of the
contract was completed. The architect had issued certificate of approval covering 50% of the
contract price and the contractor had been paid Rs. 3,75,000 on account.

Prepare the contract account. Also show how the work in progress will appear in the
balance sheet of the contractor as on 31st December, 2015.