CONTRACT COSTING : 1 Income Related Terms ~ contact Pc, Payments and Retention Money Expenditure Items - Materials, Labour, Direct Expenses, Indirect Expenses, Depreciation, Sub-Contract Eonwet ae Work, Cost of 8.1 Basics 'g.1.1 Meaning of Contract Costing 41. Contract: Contract refers to a large job / assignment / work order, where the execution of work is spread over twa or more fancial years. Generally, a Contract commences in one financial year, but ends in a different year. 2. Contract Costing: Contract or Terminal Costing involves ascertainment of costs of contract. It is an extension of ‘principles of job costing for long-term projects like Civil Construction, Ship Building, Interior Decoration, etc. 8.1.2 Features of Contract Costing ‘The folowing are the major features of Contract Costing ~ 4 Parties Involved: The parties to a contract are ~ (a) Contractor ~ One who undertakes and executes work under 2 ‘contrac, and (b) Contractee — One for whom the work is undertaken. ‘Site Work: Major part of the work in each contract is generally carried out at the site of the contract. Direct Expenses: Most of the expenses incurred by the Contractor are directly relatable to the site. Indirect Expenses: Indirect Expenses, e.g. Administrative Office Expenses and common expenses are apportioned to Yarious contracts on appropriate basis. For example, depreciation of common equipment used on various contracts is 2pportioned on the basis of the number of days the equipment has been used on various contracts. Separate Accounts: A separate account is maintained for each contract, to ascertain Profit or Loss. + Cost Centre and Cost Unit: The Cost Centre (place) and Cost Unit (output) in Contract Costing is the Contract itself, 6, Building Construction, Recognition of Profit: A contract usually takes long time periods for completion. In certain years, no contract might ‘be completed, while in others, many contracts may be completed, Recognition of Profits after full completion of contract ‘Might lead to wide fluctuations in profit every year. To avoid these fluctuations, profits are generally recognised every Year on the basis of percentage of completion and the amount of Notional Profit awn - Contract Costing ‘Contract refers to a large job / assignment / work order. ‘The execution of work is spread over two or more financial “- years. ing 1S applied In Printing Press, Furniture works, | Contract Costing is applied “in actviiES Ke CNil err Detonation and oer sr wrk Construction, Ship Building, etc. ee Scanned with CamScannerTan (@) The Contractor i assured ofa fixed percentage of profit, There | (a) There ho Ress fs the Con is no risk of incurring any Joss on the contract. hex production. (©) Tt ts useful particularty when the work to be done is (b) The Contractee may not know ‘definitely fixed at the time of making the estimate, cost of contract till its completion’ (©) Contractee can ensure himself about the cost of the contract, 3s Fixed Price Contract, where his o hhe is empowered to examine the books and documents of the cost is pre-determine ; Contractor, to ascertain the accuracy of the costs. Mlustration: ‘Wis Builders & Co. is proposing to take a contract to build a Housing Project for a big client. The Firm is less ‘Price to be quoted for the contract. Suggest the appropriate pricing method to them. 1, ‘Since M/s Builders & Co. is not fully confident in quoting the price, Cost plus Contact Method is a better optan ‘Safeguard it from unexpected losses. 2. Cost-Plus—Contract provides for the payment by the Contractee, of the actual cost of construction, plus a stip Profit, mutually decided between the two parties. 8.1.5 Fixed Price Contract 1. Meaning: A Fixed Price Contract is one where the Contract Price is fixed and determined in advance at the time entering into the agreement. Such type of contracts is entered into when contract costs can be reasonably with @ degree of certainty. Advantages and Disadvantages: ‘Advantages Disadvantages (2) The Contractee's outflow on the | (a) Contractor may resort to the use of materials of lesser quality / ‘contract is known and determined in| to increase his profit margin. advance. (b) Contractor may incur losses if he had not estimated the ¢9 (©) It is useful specially when the costs of | costs properly or if price levels increase due to abnormal work to be done can be determined | after entering into the agreement. with certainty, (©) Contractee cannot have any idea about the real costs Sint Cannot examine the books of the Contractor. 2 8.1.6 Escalation Clause 1. In Fixed Price Contracts, the Contract Price is fixed and re-determined. If there is an increase in prices of rates of labour, etc. during the period of execution of a contract, the Total Cont the Contract cae : itract Costs may rise and 2. This increase in prices may induce the Contractor to use materials of i ‘al profit margin on the contract. lower quality and price in order to 3. To overcome such a situation, the agreement generally contains a stipulation that the Contract Price wil bé by an agreed amount or percentage, if the prices of Materials, Wi iit, SU ae stake dled ‘ages, etc, rise beyond a particular I Scanned with CamScannerSS work also credited to Contract A/c under the head {g wove t Work Certified constitutes Income onthe Contract, and | _ "Workin Progress {¢.cedited to the Contract A/c and debited to Work-in-Progress | (c) Cost of Work Uncertified = Total Cost to date ‘Nc (f the contract is in progress) or to Contractee's A/c (ifthe | Less Cost of Work Certified Less Material in ‘contract is completed). Hand Less Piant at Site (at WD). Total Work done during the [Bate of commencement of |_Work Certified, { Date of last certificate |_Work Uncertified [ End of financial ‘contract work = by Architect/ Perera year | eg. 12" May 9.10" Dec. eg. 31* Dec 8.2.2 Work Certified vs Work Uncertified Work Certified Work Uncertified | It represents work done during the period, and also | It represents work done during the period but net yet certified by the Architect / Surveyor. certified by the Architect / Surveyor. 2 | The amount of Work Certified is based on Architect's | Cost of Work Certified is based on the Contractor's own Corticates. estimate, 3.) indudes profit element, since it is based on | Its a conservative cost estimate and does not include any Contract Price. profit element. 4 It is considered for calculating percentage of | It is mot considered in calculation of percentage of completion. completion. 5.|It provides the basis for claiming periodical Progress | It arises due to time gap between the date of previous Payments) from the Contractee. certificate to the close of the financial year. Wote: Value of Work Certified and Cost of Work Uncertified constitute Ineame on a Contract, and is credited to the Contract Account in the books of the Contractor 42.8 Progress Payments and Retention Money Progress Payments / Cash Received: (2) Payments received by the Contractors when the contract is “in-progress” are called Progress Payments or Running Payments. (b) Such payments are released by the Contractee on the basis of Architect's Certificates and as per the terms of the he (©) Generally, the entire amount of work certified is not fully paid, A percentage of the amount due (called Retention ‘ IS retained and only the balance i pai tothe Contractor, Retention Money: {®) The amount withheld by the Contractee while making progress payments, is called Retention Money. | > Tccoe" (See Note 4) (@) Estimated Total Profitx i.e. Formula relating to Substantially Complete coma Note: 1. ETP based formula can be applied — 3. Even where the ETP related information is avail Formula (e) & (f) may be applied for profit recognition. 1 Cash Received Formula (f) shall be modified as +x Notional Profit x C@8h Received cents. 0 3 Work Certified * 1” ©@5® of 26% to 50% complete The Prof recognised / transferred to the P & L. Account should be determined on prudence / conservatisa ie. If all the formulae are applied, the least ibe choad ' ‘Notional Profit may also be used to recognize proft Ha 8.3.4 Rules for Provisioning for Losses on Contracts The rules in respect of Profits and Losses o be recognized on Contracts ls summarized below = Current Year Estimated Treatment Te Profit should be recognized only if percentage of completion fs * 2* ‘Notional Profit | Estimated Total Profit | {0 86 Scanned with CamScannerEstimated Total Loss Estimated Total Profit Estimated Total Loss By Reserve Profit b/d Contract Account is generally prepared in three segments. They are ~ Fist Segment: initial Comparison of Incomes & Expenditures forthe period, leading to Notional Profit, Second Segment: Recognition and Transfer of a partion of Notional Profit to P & L Account and the balance carried ,, [zrard 2s Reserve Profit. (Note: Such transfer is as per conventions given above, for decision-making purposes ] > Third Segment: Carry forward of balances from one financial period to another. Hence Third Segment of the previous Peted becomes the First Segment of the next financial period. (Note: The Third Segment isnot totalled, itis only the ‘ary forward of account balances from one periad tothe other. Presentation of WIP in B/ Sheet till a Contract is comy rent, WIP is generally displayed as under - (only abstract is given here) ‘CURRENT ASSETS: Contract Work-In-Progress Value of Work Certified ‘Add: Cost of Work Uncertified ‘Add: WDV of Piant at Site ‘Add: Cost of Materials at Site ‘Sub-Total ‘Less: Reserve Profi, if any, as per conventions above: Net Balance Less: in 5 Personal ‘Net Value of Contract WIP ar Scanned with CamScanner‘padhuka’s Students’ Handbook on Cost and Management Accounting — For CA Inter ILLUSTRATIONS “Fansfer of Recognised Profit to Pal, is for Management's decision making, a5 per conventions given [Note: 4. Profit Recognition with Notional Profit, B/s “4. Computation of Work Certified and Contract Price - Basics i ‘ACContract is estimated to be 80% complete in its first year of construction as certified. The Contractee pays 75% of Work Certified, as and when certified and makes the final payment on the completion of contract. The following informa available forthe first year ~ ‘© Cost of Work ~in-Progress Uncertified © 6,000 ‘+ Profittransterred to Profit & Loss A/c atthe end of Year lon incomplete contract 60,000 © Cost of work to date 7 88,000 ‘Calculate the Value of Work-in-Progress Certified and the amount of Contract Price. ‘Solution: Zz 4 Cash Re ceived 4. Since contract fs 80% complete, Profit transferred to P & L A/c = 3 X Notional Profit x qo sa, 260,000 = 2 x Notional Profit x 75% (e, Percentage of Cash Receved to Work Corfe is 75% gen ‘On solving the above, we get Notional Profit = € 1,20,000. 2. Notional Profit = Work Certified + Work Uncertified less Cost of work done till date: 1,20,000 = Work Certified + ® 8,000 - % 88,000 ‘On solving the above, we get Work Certified = € 200,000. n G _ Work Certified __%2,00,000 a i ~ Contract Price ~ Contract Price = 80%, So, Contract Price = 2. Contract Costing - Contract Alc, and Contractee’s Alc ‘Z Limited obtained 2 Contract No. 999 for € 50 Lakhs. Details ofthis contract for the year ended 31* March are - Particulars i Particulars Materials Purchased 41,60,000 | Electricity Charges Materials issued from Stores 5,00,000 | Plant Hire Expenses Wages and Salaries Paid 7,00,000 | Sub-Contract Cost Drewing and Maps 60,000 | Materials returned to Stores ‘Sundry Expenses 15,000 | Materials returned to Suppliers ‘The following balances relating to the Contract No.999 forthe year are available: _ Particulars ‘As at Boginning of the Year | Work Certified © 12,00,000 ‘Work Uncertfied © 20,000 Materials at Site © 15,000 © 10,000 | Wages Outstanding nf = The Contractor receives 75% of Work Certified in cash, Prepare Contract Account and Contractee's Account. e Particulars To balance b/d ~ Work Certified 12,00,000 | By Work in Progress = Work Certified = Work Uncertified 20,000 = Work Uncertified To Material at Site b/d 15,000 | By Materials Returns Stores To Material issued 5,00,000 ~ Supplier To Materials directly purchased 41,60,000 88 Scanned with CamScannerSpiess Ne= transfer (Note b) = prof cd — balancing figure ‘Total | By Notional Profie b/d By Reserve Profit b/d Work Certified _ 35,00,000 lowing details are available from a Contractor for a percentage of COmpIetION = Ce Brice ~ 50,00,000 ~ 2 sa po vensered to PALA 5 x Notional Pron x Cash Received = 2 28,35,000 « 75% = €4,17,500 2. Contractee's A/e z Particulars I z 26,25,000 | By balance b/d (80% of Work Certified on Opening Date) -9,00,000 By Bank [75% of (8 35,00,000 - @ 12,00,000)] 47,25,000 26,25,000 Total 26,25,000 Profit, Balance Sheet Abstract = SS ular construction work for the year ended 31% March — Particulars: z Particulars 91,00,000 | Material returned to Store ceived from Contractee (90% of Work Certified) | 71,91,000 | Head Office Expenses apportioned 35,82,600 | Cost of Work Uncertified Estimation Cost 350,000 | On 31%" March: paid 32,62,700 Material at site ‘of Pant installed at site 7,00,000 Accrued Direct Wages 468,000 ‘Accrued Direct Expenses Value of Plant (as revalued) 6,16,000 Expenses: 203,000 (1) Prepare the Contract Account for the year ended 31% March. (2) Show the relevant Balance Sheet entries. 1. Contract Account for the year ended 31" March t Particulars: e '35,82,600 | By Work in Progress A/c =e 32,62,700 fe €71,91,000 Payabie__78,120 | 33,40,820 Aver Carted, (= sag) 79,90,000 Paid 1,68,000 Work Uncertified 3,172,000 Payable 9,310 1,77,310 | By Materials ~ returned to Stores 14,840 3,50,000 | By Materials at Site 85,400 at site 7,00,000 | By WOV of Plant at site 6,16,000 2,03,000 2,50,000 balancing figure 419,510 '90,23,240 Total 90,23,240 89 Scanned with CamScanner—— Handbook on Cast and Management Accounting — For For CA Inter Particulars ToPAL Acc — Proft transfer ~ See Note b To Reserve Profit c/d ~ balancing figure Total To Work-in— Progress b/d (WC+WUC) To WDV of Plant at site b/d ‘To Materials at Site b/d Notes: (8) Perckrnage of Completion = Work Cortiied , £7 care €71,91,800 co Receted’ = 25 949510 LAME 0 251,700 Certified ~ 3 2 x {@) So, Profit trfd to PAL Afe= 5 x Notional Profit x For, 2. Balance Sheet as on 31 March (Abstract) _ Liabilities z Assets Fixed Assets: Profit and Loss Ae 2;51,706 | Current Assets: Contract Work in-Progress (Note: Overall Net Profit of the Company Work Certified ‘will be determined after debiting Period Work Uncertified Costs, Unallocated HO Costs, Interest, Tax, Plant (WDV) at Site (See Note a) etc. in the General PRL A/c.) Materials at Site Sub-Total Current Liabilities: Less: Reserve Profit (or Profit-in-Reserve) Wages Accrued 78,120 Net-Total Direct Expenses Accrued 9310 | Less: _ Contractee’s Account balance Net Value of Contract WIP Total Total ‘Note: (2) WDV of Plant at site can also be shown under the heading "Fixed Assets”. (0) The above is only an extract of the Balance Sheet. Hence, Totals are not drawn up. 4. Profit Recognition with Notional Profit, Balance Sheet Abstract till contract completion ss ‘The following information relates to a contract for & 75 Lakhs (Retention Money = 10% of Work Certified) Particulars Year! Year It 9,00 11,00 Soaks 8,50 11,50 as fisions 35 4,25 an sicnetoe! 8 2 er carte te 17,50 56,50 ‘Uncertified at year end - Plant issued fe = Value of Plant at year end 0 Prepare te Contract Account fr al the Wee Yar and Show th elovant igre nthe Balance Thee ct Account for Year I 000s Particulars 9,00 | By Work-In-Progress ~Work Certified 8,50 | By balance c/d ~ Plant (WDV) at site 35 | By Loss ¢/d — balancing figure t To Plant (Cost) a Total 100 To t 19,00 Total Telos b/d 70 Profit and Loss Account — Loss Transfer 8.10 Scanned with CamScanner000s Work Uncertified 1,00 y balance ¢/d Plant (WOV) at ste 50. 8 eg ‘and Loss A/C = Profit transfer Profit o/d — balancing figure = Sub-Totat 7 Se Rese ott oa ee Net Balance 18,30 51,70 = 15,75 50,85 eee Account = 90% of Work Certified aa 8 ‘Value of Work in Progress erm, : the following items wil be shown in the Balance Sheet — Assets Side: . when the Contract is fully complete, cones Heck ae (Fed esate eo 20, () current asses (Recevabls Retention Money) 50 ( 00). Bal Scanned with CamScannerPadhuka’s Students’ Handbook on Cost and Management Accounting ~ For CA Inter __ ad 8. Profit Recognition with Notional Profit - Reverse At the end of first year on 31" March, in the books of AB\ debited with the cost of Materials Issued, Labour, Overheads expended Material at Site © 25,000, Material Returned © 15,000 and Plant at Site © ‘Material Issued, Labour, Overheads and Plant issued debited to the Contra‘ ‘of the Contract had been certified by the Contractee’s Architect as comp! 0% Certified work value had been received in cash & 16,20,000, The Accounts Department informs that 2/2 ofthe profi. ‘cash basis credit to Profit and Loss account on the contract is € 213,600. From the above information, prepare ~ ‘ {a) Bridge Contract Alc showing the cost of work done but uncertified, (b) Work-in-Progress Alc, & (<) Contractee's Ae, ‘Solution: 41. Contract Account for the year ended 31% March 2009 Particulars zg ne Particulars ToMatenalsisued (WN) 7,00,000 | By Work in Progress A/c To Direct Labour (WN) 5,60,000 | _ work certnea (21620000 » 90% To Overheads (WN 1) 280,000 | — Work Uncertified (balancing figure) To Pant at cost (5475.000 5,60,000 By Materials at Site (given) ‘To Notional Profit (WN 2) 3,56,000 | By Materials returned (given) By WDV of Plant (given) (after 15% deprn) (i.e. 100% — 15% = 85% of Cost of Plant) Total 24,56,000 Total ‘To P & L A/c ~ transfer (given) 2,13,600 | By Notional Profit b/d To Reserve Profit c/d — balancing figure 142,400 Total 4,19,510 Total To Work—in- Progress b/d (WC+WUC) 19,40,000 | By Reserve Profit b/d To WDV of Plant at ste b/d 4,76,000 To Materials at site b/d 25,000 Wnt: ‘Item | Material Issued Labour oH Ratio 5 4 2 ‘amount | (® 5,60,000 x 5/4) (© 560,000 x 4/4) (® 5,60,000 x 2/4) © 5,60,000 Comp = £700,000 = © 5,60,000 = €2,80,000 using Deprn Rate & 2 WN 2: tis given that Profit recognized = 7 x Notional Profit x otecewel = €2,13,600 z £16,20,000 So, 5 * Notional Profit +599," € 213,600, On solving, we have, Notional Profit = € 3,56,000. 2. WIP Account Particulars t sy Te Gira = Work Certied 78,00,000 Siete he 100, Meek cere +1,40,000 | By balance c/d 39,40,000 Total 2 's Account ie Particulars T t To balance dd ro Particulars . By Bank ee real rasa x(gven) Scanned with CamScanner‘oe Fe nding a8 on 3 March peiod-end 120,500 per month 907 Et to Se (on Commencement Date: 1 Jy) 771,000 cat upevsor (34 te devoted to Contact) 9,000 per month Somerton ad Oe Expenses see administration Expenses 19,000 fre nnd at tea. on 31" March (paid-end) 75,800, sed forthe contract has an estimated life of 7 years with residual value at the end of life & 50,000. Some of ‘Pont © 13,500 was found unsuitable and sold for ® 10,000. Contract Price was % 45,00,000. On 31 March ean, 29 ofthe contract was complete, The Architect issued Catfieate covering 50% of the Contract Price and ‘Fictr has been paid € 20,00,000 on account. Depreciation on Plant is charged on SLM basis. Prepare Contract Alc. ‘note: In this Question, Cost of Work Uncertified is not given. However, Total Work Done is 2/3 or 66.67%, | Shr exent of certification is 50%. Hence, balance 16.67% constitutes Work Done but not certified. This should be ‘Tented on proportionate cost basis in the following manner. Contract Account for the year ended 31 March Particulars z Particulars: z ‘ 7,74,300 | By Cost of Contract jd (bal. fig.) | 26,39,600 “wlabow Charges (Paid + P’ble) 11,81,500 | By Materials A/c — Cost of Materials sold 13,500 + 102,500) “TeEngneer’s Salary (20,500 x 9) 1,84,500 | By Materials c/d ‘75,800 ‘Salary (9,000 x % x 9) 60,750 4,50,600 77,250, 27,28,900 Total 27,28,900 26,39,600 | By Work-in-Progress Account = Work Certified EWN (a}] 22,50,000 Profit /6 (balancing figure) 2,70,300 | _- Work Uncertified [WI (b)). 659,900 Dy Total 29,09,900 Total 29,09,900 TE Account — Profit wanster [WN (€)] ‘80,089 | By Notional Profit b/d 2,70,300 ce Ff, figure) 4,90,214, a Total 2,70,300 | ‘Total 270,300 Cee (22,50,000 + 6 59,900) | 29,09,900 | By Reserve Profit 190211 Meta 75,800. » (het Wer cated » 45 Las 50% + € 22.50 as (57% work done = € 26,39,600 (as per Contract Nc above) ae 4 Cost of 16.67% work done (Le, Uncertified Work) » € 26,39,600% &= io = ® 6,59,900 W® of Completion = Work Certified. (given) eee Win ‘rte par nen nana men BER «270300 ELOED «09 2 Sale of {000 » € 3,500) may be directly considered in General P & L A/c. ‘unsuitable material (@ 13,500 ~ € 10, Sale Valse maybe erected to Contact AEM. : 813 Scanned with CamScannerPadhuka’s Students’ Handbook on Cost and Management Accounting ~ For CA Inter iy was engaged on only one ary. During the Year re erat € 5000 and Materials that ome Contractors Ltd began operations on 1 Value of & 4,00,000. Of the Plant and Materials charged to contract, were lost in an accident. December, done but uncertified was ¢ On ste , cost € 5,000 was rotuned to store, the cost of work un ates costing ©4080 wae hand on stn, You re rere charge 10% depreciation on plant and compilg Account and Balance Sheet from the following Trial Balance on 31% December — Particulars Debit in & ‘Share Capital Creditors Cash received on Contract (80% of Work Certified) ke Land and Building y Bank Balance oe Expenses charged to Contract: Materials ses ral ‘4.00 Expenses 7,000 Total 3,30,000 Solution: 1 Account for the year ended 31 December Particulars z Particulars To Materials Issued 90,000 By Work in Progress A/c Less: Lost 4,000 86,000 | _ s.2,00,000 To Pant Issued 35,000 Ses, 0% Less: Lost 5.000 20,000 | — Work Uncertiied To Labour 1,40,000 | By Plant returned (WDV) (WN a) To Expenses 7,000 | By Materials at Site To Notional Profit c/d — balancing figure 21,000 | By Plant (WDV) at Site c/d (WN a) Total 2,74,000 ___ Total To Profit & Loss a/c - transfer (WNc) 11,200 | By Notional Profit b/d To Reserve Profit c/d — balancing figure 9,800 Total 21,000 Total ‘Notes: (2) Depreciation and WDV of Plant: ‘+ Cost of Piant at Site = Plant Issued 25,000 Less: Lost 5,000, Less: Returned 5,000. Hence = € 15,000. '* Depreciation: on Plant Retumed = 5,000 x 10% = % 500, on Plant at site = 15,000 x 10% = % 1,500. ‘+ WDV: Plant Returned = 5,000 less 500 = & 4,500, Plant at Site = 15,000 less 1,500 = ® 13,500 ion = Work Certified _ % 2.50000 _ Qa Pereeoo of Comletion = a Trango” oe a Cash Received _ 2 z So, Profit = 2x x Cash Received © transferred to P&L. A/c* 3 * Notional Profit War ied = 3% * 21,000 x 2. Profit and Loss Account Particulars x Particulars ‘To Abnormal Loss ~ Plant 5,000 By Contract Account ~ Profit b/fd Materials 4,000 9,000 ‘To Net Profit c/d 2,200 Total 414,200 Total = Value of Contract Work in Progress for B/s Particulars Work Certified Work Uncertfied 814 Scanned with CamScannerContract Costing z 13,500 2,69,500 | @ 2,59,700 (2,00,000) | 59,700 8 at 31" December abilities. t Assets s 1,20,000 | Land and Building 43,000 a PLAC 2,200 | Plant (at Stores) 450 eee: Sundry Creditors, 10,000 | Contract Work-in-Progress (as per WN above) 59,700 Bank Balance 25,000 Total 1,32,200 Total 1,32,200 PACCOURES! | Ss COURON AL RO OH ITER eT TTT House (P) Ltd is engaged in building two Residential Housing Projects in the city, with particulars as under — Amount in & HP-1 HP -2 ‘parkin Progress on 1* April (year beginning) 7,280,000 2,80,000 ipawils Purchased 620,000 8,10,000 _ianipurchased near to the Site to open an Office J 12,00,000 _golerage and Registration Fee paid on the above purchase 2 ‘60,000 ages paid 85,000 62,000 ‘tages outstanding 2s on 31" March (year end) 12,000 400 ‘eraton pad to Local Clubs 5,000 2,500 ‘Pact ire Charges paid for three years effecting from 1* April (year beginning) 72,000 57,000 sof Materials at Site as on 31% March (year end) 47,000 52,000 Price of the Projects 48,00,000 /36,00,000 of Work Certified 20,50,000 16,109,000 We ot Certed 490,000 "ACneree Mature Machine was bought on 1* April (year beginning}for & 8,20,000 and used for 180 days in HP-1 and for 100. ‘4s ia HP-2. Depreciation is provided @ 15% p.aThis machine can be used for any other projects). As per the contract ‘a7venent, the Contractee shall retain 20% of Work Certified as Retention Money. ‘Prpare Contract Alc for the two Housing Projects showing the Profit or Loss on each project for the year ended 31% March. Contract Account for the coded 3° harc (amouna i) ‘HP-1 HP-2 Particulars: 7,80,000 | 2,80,000 | By WIP: 6,20,000 8,10,000 | Value of Work Certified 20,50,000 | 16,10,000 ToWages: (865,000 + & 12,000) 97,000 Cost of Work Uncertified | 1,90,000 | 1,40,000 (62,000 + & 6400) 70,400 | By Material at site c/d 47,000 | 52,000 HPL HP “lyd Local Club (Note 1) 5,000 2,500 ‘oad and (® 57,000%1/3) 24,000 19,000 820000) Mixture M/c: * 15% x 180/365) 60,658 7,00,342 | _5,86,401 | 22,87,000 | Scanned with CamScannerPachka’s Students’ Handbook on Cost and Management Accounting ~ For CA Inter HP-1 jek P=? Particulars TOP ALAC (Note 3) 1,86,758 1,56,374 | By Notional Profit b/d 7,00,342 27, Toneve Meme (oe. fy) _} SRSA S50 Total 70342 above projects, hence included in the Contract oly to th ve or 16,10,000 4 yang 36,00,000 ‘Note: ‘Donation paid to Local Club is assumed as excl Work Certified = 20,50,000 42.71% HP -2 = 2 Percentage of Completion = corrract price ' MP1 400,000 1 Cash Received 3. rofitto be recognized in PAL Alc = x Notional Profit * ‘ork Certified aa = HP: } % 7/00,942 x 80% = €1,86,758 — HP-2: 5 x 5,86,401 * 80% = © 1,56,374 '8._ Escalation Clause with multiple restrictions / ceiling limits iiss ‘ACContract contained an Escalation Clause forthe following tems of Cost as under — ‘+ Material X: 40% of the Cost above 12.5% of Normal Price Levels. ‘* Material Y: 50% of the Cost above 15% of Normal Price Levels, restricted to an amount of ® 50,000. © Material 2: 50% of the Cost above 10% of Normal Price Levels, restricted to an amount of Z 75,000. ‘= Labour: 20% of the Cost above 10% of Normal Wage Rate Levels. {tis to.be noted that the Proviso to the above Escalation Clause stipulates that the any amount of Escalation Claim in ‘% 1,50,000 shail be ignored. * ‘The Contractor submits audited Statements towards the following Costs at Normal and Actual Price Levels. Comte te amount of Escalation Claim in this case. k Particulars Cost at Normal Levels (®) ‘Actual Cost Material X 300,000 Material Y 4,00,000 Material 2 9,00,000 12,00,000 Escalation Claim is as under — | Computation Eacalation! 40% x [% 3,80,000 ~ (% 3,00,000 x 112.5%)] cp a % [8 5,80,000 ~ (® 4,00,000 x 115.0%)} 760,000 restricted bE + [8 11,50,000 = (%9,00,000 x 110.0%)} 80,000 restricted i K 80,000 wet 20% * [8 14,50,000 — (¥ 12,00,000 x 110.0%)) Scanned with CamScannerContract 7] 2] aon | 120,000 0,000 pn 0,000 60,000 ae aise 3,000 4,000 1 had been negotiated two years back with an escalation clause providing than 2.5%, the Contractee would increase the Contract cost of materials and wis gen wag ats beyond 28 in each cae Paes Rt Be since the signing of the agreement the Rates by 15%, the value paged es ot take Im account the eect of he asad Bane UP by 10% and Wage by 15%, Installed on the dates ofthe contracts and depreciation i ‘10% par annum, Prepare the respective rez nthe Contact Ledger and gv sutaleenties nthe Coney Danses hea 4. Computation of Escalation Claim (Note: Escalation Clause is applicable only for Contract No.1.) (@) Materials No claim Escalation Claim = 20% of this difference tewief Normal Cost Permissible Cost Actual Cost ry = 100% = Normal +2.5%=102.5% Given = 110% + ’ Consumed = 237,400 «100 Escalation Claim = 20% Purchases tess Closing Stock matenais, 110 234,000 + 2.5% = of (37,400 — 34,850) = © 39,400 - 2 2,000 = 234,000 734,850 =%510 =%37,400 (b) Labour No claim Claim = 40% of this difference lect Normal Cost Permissible Cost: Actual Cost os = 100% = Normal +2.5%=102.5% Given = 115% 264,975 x10 Escalation Claim = 40% Wages incurred= Paid + Prble us 756,500 + 2.5% = of (64,975 — 57,912.50) = % 63,250 + 81,725 od = % 56,500 57,912.50 = 72,825 = % 64,975 2. of on Plant used Contract Number 1 2 3 Value of Pant (2 ) 10,000 8,000 76,000 Period of use 1” Jan to 31% Dec = 12 mths | 1" July to 31 Dec. = 6 mths 1" Oct to 31 Dec. = 3 mths. Depreciation at 10% p.a £1,000 e400 t150 3. Contract Account for the year ended 31 December 2| 3) Total| Particulars a 2 3| Total “hates 394001 25000 | 10000 | 78400 | By WIP ave Wes Work Certified 120000 | 80000 | 18000 | 218000. ‘ed 63250 | 56200 7000 126450 | -Work Uncertified 3000 4000 1050 8050 1725| 1800| 800 | 4325 .| By Contractee's 3335 ae nappies Gen Eps a/c ~ Escalation (Note) 2000| 1400] 500} 3900 | By balance c/d 300 200| 100 600 Materials | 2000 2000} 1000} so00 nM 1000] 400) 150 | 1550 | By Loss eld =| 3000 =|» 3000 Pr | 20660 =| 1500 | _22160 “etal | 2eaas | eo000 | 20080 | 237305 Total 128335 | 89000 | 20050 | 237385 817 Scanned with CamScannerPaduka’ Students’ Handbook on Cost and Management Accounting - For CA Inter - Total | _ Particulars. a 2 Particulars a me 3 | By Notonal Pt b/d | 20660 = irene 10330 - =| 10330 | By P&L tr 3000 nw | 1500} 11830 | To Revere PR ae 3000 1500| 25160 _Total 20660 | 3000 el 773000 | 84000 | 19050 | 22050 | By Reserve 10330 Nil oft b/d 2000 | 1000 | _5000 | P To Matis b/d = a the Escalation Claim of€ 510 + € 2,825 = € 3,335 (See Workings above) Contractee's Account —-Or,_-— 3,335 To Contract Account Sa 4. Profit Recognition Contract Number a 2 [ {@) Notional Profit [as per Contract A/c) 20,660 (3,000) Work Certified | (0) % of completion = price — 59% 2 aan (3,000) Loss fully denaut 5 * 20,660 x 75% = 10,330 ee 5. WIP to be displayed in Balance Sheet Contract Number | 1 2 Work Certified 1,20,000 80,000 Work Uncertified 3,000 4,000 Materials Lg 2,000 2,000 Less: Reserve (10,330) Nil Less: _Contractee’s A/c (90,000 — Esc. Claim 3,335) (86,665) (60,000) Net Value of WIP 28,005 26,000 "Note: Cash received on account should not be mera ‘11. Profit Recognition — Conservatism ly subtracted to arrive at the net WIP valu 'S recorded by a Journal Entry, the net balance in the Contractee’s A/c should be consider red, Profit Recognition using Notional Profit & ETP (M98, NO7,N 12,0) 5,050 ie. Where Escalation Cain The following particulars relate to a contract which is 80% complete — Particulars t z Particulars ‘Total Expenditure to date 8,50,000 | Work Certified 10,00,000 Estimate further expenditure to complete the Contract 1,70,000 | Work not certified 85,000 Contract Price 15,30,000 | Cash received ag. 1. Compute 2 Conservative Estimate of Profit to be recognised, using appropriate methods. 2 ‘What would be the Estimated Profit from the Contract, if the Contractor has come to know that the Contractee has lquist) ‘crunch and it is not able to pay further payments? ‘What is the amount of loss to be provided for, if the total expenditure till date were € 11,30,000 and the estimated fut ‘expenditure is ® 7,00,0007 All other data in Part (1) remains unchanged, 1.Profit Recognition with given data Work Certified _ © * ‘Contract Price ~ ¥15,30,000 = Income Uill date (|,e. WC + WUC) less Expenditure tilt date = (® 10,00,000 + © 85,000) ~ & 8,50,000 = Contract Price less Estimated Total Costs = € 15,30,000 ~ (8 8,50,000 & 1,70,000) = Least of the following (a) to (2) Scanned with CamScanner- ene on one gated 7921 OT Contract Price = 510000 x Oo 03,33,333 Work Certified | Cash Re: . ‘ ‘Total Profit x « celved oy « 110,00,000 18,16,000 _ ¢ 272,000 eset aera 510,000 * 75 30,000 * * 10,00,000 mated TO! POM Fated Total Costs” = €5,10,000 « ea 7425000 Cost till date Cash Re Total Profit: xa Re calved £850,000 , ¥ 816,000 _» wor" Estimated Total Costs“ Work Cartned.~* 5" #16 29,609 * 100,000 Work Certified 00, gene POM * Contract Price. = 235,000 « LOSE = 159/595 : ah Ra coves 2 1 8,16,000 2 Prof Conner mone , £816,000 _ ¢4.27,840 oo Work Certified _ © 2,35,000 x 2.£ffect of Liquidity Crunch of Contractee Contractor comes to know that the Contractee is having liquidity crunch and not be able to pay further cash saan esna conservatism / Prudence, the Loss should be recognized Ten ot immediately. [oss = Income til date (Cash received) less Expenditure til date = € 8,16,000 ~ & 8,50,000 = Loss (® 34,000) 3.Effect of Change in Future Costs fy Pecentage of Completion. (as above) 65.36% = Income till date (i.e. WC + WUC) less Expenditure till date 2 Cet Year Prof = (¥ 10,00,000 + & 85,000) ~ & 11,30,000 Loss (% 45,000) = Contract Price less Estimated Total Costs i stmated Total Prome(ETP) | — x 15,30,000~ (® 11,30,000 + & 7,00,000) tasieasaeet| Tisstobe tansferred to PAL _| = Current Loss or Estimated Total Loss, whichever Is worse | Loss (€ 3,00,000) {Notional Proft and Estimated Total Profits -ProfitRecognition, ‘ACanract expected to be completed in Year 4, exhibits the following information — {information in) Exéol Year | Value of Work Certified | Cost of work to date | Cost of work not yet certified ‘Cash received 1 0 50,000 50,000 ° 2 3,00,000 2,30,000 10,000 275,000 3 ,00,000 6,60,000 20,000 750,000 Price is ® 10,00,000 and the estimated profit is 20%. You are requirea to calculate, how much profit should have _ es crecited tothe Profit and Loss Alc by the end of years 1, 2and 3. Year2|_ Year 3 300,000 800,000 10,000 20,000 3,10,000, 3,20,000 2,30,000 6,60,000 80,000 1,60,000 800,000 %10,00,000 * 8% Cash Received | 2 Cash Received Work Certited. | 3 “NOUN PR Ti Certiied 275000 | 2 8750000 3oqa00 | “3M FEG5 000° = 024,444 = £1,00,000 Scanned with CamScannerPadhuka's Students’ Handbook on Cost and Management Accounting ~ For CA Inter Work Certified er x Sok aed 3.00 | 2.75 (©) ETP x Work Certified Cash Received = 2.00 i500 "3.00 Contract Price“ Work Certified = £55,000 2.30 er Cost ti date = 2.00 «220 = ¢ 57,500 (OEP Served Teal Co 505 7 (@ Eve x __COSt il date, Cash Received = 2.00% 220 x 5 Estimated Total Costs“ Work Certified 052,708 Work t 300°, ¢ 24, (© Notional Proftt x Cee 0.80 * 505 000 ‘The least amount of Profits may be transferred to PAL AV based on Notional Profits, on prudence / conservatism bass ‘18 Notional Proftand Estimated Tota Profits -ProftRecogntton ie Paramount Engineers are engaged in construction and erection of bridge under long-term contract. The cur ak ‘31 March was as under: ~ Fabrication Costs: Direct Materials © 280 Lakhs Direct Labour % 100 Lakhs Overheads: @_60 Lakhs ‘Total Fabrication Costs © 440 Lakhs: ‘Add: Erection Costs 2410 Lakhs ‘Total Costs to date 550 Lakhs ‘The Contract Price is € 11 Crores and the cash received on account til 31% March was € 6 Crores. Work Certified til 1 Mark was however T 6.80 Crores. ‘A technical estimate of the contract indicate the following degree of completion of work — ‘Fabrication: Direct Material - 70%, Direct Labour and Overheads ~ 60%. Erection - 40%, ‘Estimate the profit that could be taken to Profit & Loss A/c against this partly completed contract as at 31* March. Solution: 1. Statement of Current & Total Profits (in € Lakhs) Particulars: Till Date ‘A Income 8. Expenditure Fabrication: Materials, ioe 100.00 ‘Overheads 60.00 8.20 Scanned with CamScanneryr Contract. Costing FemerTosr «ORG, Cb a 1s « M000, SBD ogy iqenrsted 101 POTX tay Th Ss ~15833 Sitgy 2248 grit Tal POR tet Toa Ss + teed = 150.33 x $5000 $0000. g1.60 qn PM = 13000 « So = 80.36 bx ton PO cae = 3x 130.00 x 008 = 76.47 Bate (ieee beans Remeve hone SUIS ee ee ee {4 Estimation of Total Profit and Profit Recognition ™~ NS ‘sprene Constructions are engaged in building contracts. One of their contracts commenced 15 months ago remains ssiished. The following information relating tothe contract has been prepared forthe year just ended — Particulars % 000s ‘Contract Price 2.500 ‘Value of Work Certified at the end of the year 2200 Cast of work not yet certified at the end of year o ‘Opening Balances: Cost of work completed 00 Materials on Site (Physical Stock) 10 ang the yor: Materials delivered to site 610 ‘Wages 580 Hire of Plant 110 Other Expenses 30 Cosi Batance: Materials on Site (Physical Stock) 2 ‘4s soon as materials are delivered to the sit, they are charged to the Contract Account. A record is also kept of materials as ‘bes actually used on the contract. Periodically a stock check is made and any discrepancy between Book Stock and Pyical Stock is transferred to a general “Contract Material Discrepancy” Account. This is absorbed back to each Contract, ‘arenty atthe rate of 0.5% of Materials booked. The stock check atthe year-end revealed a Stock Shortage of € 5,000, ‘saédlion to Direct Charges listed above, general OH are charged to contracts at 5% of value of Work Certified. General OH of £15000 had been absorbed into the cost of work completed at the beginning of the year. it has been estimated that further {28 to complete the contract wil be & 2,20,000. This estimate included the cost of materials onsite atthe end of the year just {nd also a provision for rectification. Dei he roaity ofthe above contrac and eoren haw mh ro oh mers 0) shou be akan ‘year just ended. i Site how your con endation nt) woud be atc tthe Conract Price was € 4 Lads rater han € 25 Lakh) and ‘ro estimate has been made of costs to completion. Assume Retontion Money * 20%. 1, Contract Account ©0005 ~~ 3,00 | By Work-in-Progress A/c 10 > Work Certified ot aE vaceoanes He '5,80 | By Contract * ie = Shortage Transfer wee 821 Scanned with CamScannerPadhuka’s Students’ Handbook on Cost and Management Accounting - For CA Inter Particulars 1000s Particulars oo 90 | By balance /d = Materials Contract Material Discrepancy A/c 3 abeorbed at 05 of (10 + 610 — 20) To General OH (5% of 2,200 less 15) s To Notional Profit ¢/d ~ balancing figure 467) = Total 2265; Total To P&L Aye = Profit transfer (See Note 2) 4,11 | By Notional Profit b/d To Reserve ¢/d ~ balancing figure 56 nana anal Total 4,67 - Total To Work-in—Progress b/d 22,40 | By Reserve Profit b/d To Materials b/d 20 2. Recognition of Profit on Prudence basis (in 7 000s) Work Certified _ 22,00 A. Percentage of Completion = concert oe osc 'B. Current Year Profit = as per Contract A/c above = as per Contract A/c above oo = Woes Wu Nota oft = 2,00 3-40-=4,67 Contract Price 25,00 ©. Estimated Total Profit (ETP) | Less: Estimated Total Costs (a) Cost till date (07,73) (b) Further Costs given (2,00) LE Profit to be trensferred to P&L_| = Least of the following (a) to (c) Work Certified 22,00 (2) Estimated Total Profit x Te ee = 5,07 x09 = 446 Cost till date he < (©) Estimated Total Profit x Se a = 5,07 5 4,51 . Work Certified 2 ea ee = 4,67 x = (© Notional Profit a (67 x 5g = ott (Note: Only these formulae are used, since percentage of payment is not given for Part (1) of the question. 3. Answer to Part (2) of the © I Contract Price were ¥ 40 Lakhs, Percentage of Completion = Work Certified _ 22:00 _ sea + Here, Profit Recognition wll be based on Notional Profit only. (since it is given that no estimate of the ‘completion has been made), Cash Received 2, OD RECHT 2. . +) Profit tobe recognised = 5 % Notional Profit x sm He cones 54162 * 80% = 2,49, 15. Estimation of Profit and Profit ih. Cantreciet had commences » Bubding Contec on October t eee pee ens et i yor hae bean sompted rom books and is as under ~ Scanned with CamScannerceived represents 80% of work certified. Khas be the materials at site as on aye arch retinal tet further cout come te the rte year on prudent basis, WAICH has tobe credited to Paleo Account for 31" March aaah Particulars 55,000 2,000 41,12,000 108,000 | By Materials at Site (given) 20,000 = 34,000 | By Cost of Contract till date ¢/d (bal. figure’) Total 3,31,000 Total Contract til date b/d 3,27,000 | ‘By Work-in-Progress A/c = Work Certified Profit c/d (balancing figure) ‘86,000 = Work Uncertified Total 4,13,000 Total Wc — Profit tf (See Note below) 45,867 | By Notional Profit b/d Profitcd (balancing figure) | 40,133 Total 86,000 Total Progress b/d (WC + WUC) 4,13,000 | By Reserve Profit b/d at Ste b/d 4,000 of Profit to be transferred to P&L _ Work Certified _ Rs.4,05,000 ge of Completion “Contract Price — Rs.4,40,000 Year Profit = as computed above in Contract A/é ed Total Profit (ETP) Contract Price less Estimated Total Costs Contract Price less (Cost till date + Costs to be incurred) 4,40,000 — (& 3,27,000 + % 23,000) tbe transferred to PL__| = Least of the following (a) to (f) $25,568, the fllowing is transferred to P&L A/c (on prudence / conservatism basis) ~ Sania Work Certified = 290,000 x 495000 _egager oT on ce M tal Prot price 4.40000 : Work Certified , Cash Received ¢.99,099 x € 408000 , 328000 _ 2 66,273 Total Prof x crrtract Price ™ Work Certified Fasano F-40500 Cost till date Estimated Total Costs ___Cost til date ___,, Cash Re elves Estimated Total Costs ~~ Work Certified Total Profit x Scanned with CamScannerOther Expenses Equipment: Net Book Vaive 1" April (begining) as Net Book Value 31% March (and) Purchases during the year the contact, including contingencies Wi estimated that additional costs of € 400,000 willbe incurred to compote 1 Cea tb Pe nt ut on wb be nn Wome for the year just ended. ‘The Directors ofthe Company propose to recognize € 24 Lakhs as Profit ; “You are required to prepare a Contract Account and indicate whether you agree withthe Directors’ proposal 2. Recognition of Profit on Prudence basis (in 7 000s) Work Certified _ 1,10,00 ‘A Percemnage of Completion — |= Contract Price ~ 1,20,00 ‘8. Gurrent Year Profit "| = as per Contract A/c above C Cost till date = as per Contract A/c above = WC + WUC ~ Notional Profit = 1,10,00 + 8,00 - 28,00 . Estimated Total Profit (ETP) Contract Price 1,20,00 Less: Estimated Total Costs (a) Cost till date (90,00) (b) Further Costs given (4,00) (c) Further Depreciation (1,75) £_ Profit to be transferred to Péi. | = Least ofthe folowing (a) to (f) (@) Estimated Total Profit x om coed = 2425 x Bed 1,20, Work Certified | Cash Received Estimated Total Profit 9 tl Prot Cee Pilea Work Cartes (© Estimates Total Pron x —_CO8 til date Estimated Total Costs Estimated coq Coat il date _ Cash Re ceived a THOPOM * rated Tol Coda” Werte 22425 x20 ‘Notional Work Certified . 9 Prom contract Price = 28,00 «759.00 Z Cash Re ceived (9 5» Maton rae Cash Re ceived Observation: The Directors’ decision prudence basis 8 16.80 Lathe” *° “maize 24 Lakhs is Incorrect, Proft to be recogrized in PSL % 824 Scanned with CamScanner‘a contract on 1* April of Year ‘contract and to take to the credit of PL ore tothe total contract. Actual Particulars — at the end atthe end 22500 tres (Historical C 4 oe : — 75000 | (On 34 Dec of Year2) 150,000 progress Ceriod nee, ba Tecate 1275000 40,000 - 10,00,000 is subject to annual depreciation at 20% on WDV Cost. The Contract is likely to be completed on 31* Dec of Year 2. ‘Prepare the Contract Account for Year 1. Estimate the ene ee Profit on the contract for Year 1 on prudent basis, which has 1. Statement of Current & Total Profits Particulars: Till date: Additional Total Given = 12,75,000 Given = 27,12,500 Given = 40,000 13,15,000 27,12,500 4,26,000 7,69,000 11,95,000 iaox (WN) 3,29,000 3,93,500 7,22,500 ‘Epenses (WN c) 77,500 2,22,500 +3,00,000 Desecation (WN d) 45,000, 18,000 63,000 Total 8,77,500 14,03,000 22,80,500 | (-8) 4,37,500 4,32,000 Notional Profit Estimated Total Profit transfer to P&L A/c (based on formula specified in the question) Fett Toa Promex. Work Certified... Cash Received _» 437,090 x £ Contract Price ~ Work Certified me %10,00,000 a %12,75,000 = © ¥59:263 ‘Year 2: 1 Apr to 31 Dec ‘Opening Stock + Issues ~ Closing Stock = ‘30,000 + 8,14,000 ~ 75,000 = 7,69,000 Paid during the year + O/S at end ~ Ofs at Opg = 3,05,000 + 24,000 = 3,29,000 3,80,000 + 37,500 ~ 24,000 = 3,93,500 Paid + 0/5 at end ~ Prepaid at end = repaid of peqrous pao ¥ Wd Seas 1,00,000 + Nil ~ 22,500 = 77,500 samel histo A eee ma 1,000 20% for 9 months = 18,000 Note Year 1: 1% Apr to 31" Mar ‘Opening Stock +Issues ~ Closing Stock = Nil + 4,56,000 ~ 30,000 = 4,26,000 Paid during the year + O/S at end = Scanned with CamScanner© Material Issued To Labour (as per WN above) To Expenses (as per WN above) f To Depreciation on Plant [He Notional Prom 0 Total To PAL A/c Profit transfer as per WN 1 above Reserve Profit c/4 |__2,78,237 Total ‘TowiP bid ‘To Materials at site b/d “18. Contract Costing - Estimation of Total Profit Lakhs. The otal Contract Value was © 100 contract is DeSeersepeeae enans seca aggro 0 ae CS eran a Ne erat arson: Particulars ‘Actual (@) F April 2017 to 31 March 2018 | 1 April 2018 to 31 December 15,30,000 10,412,500 80,000 7,50,000 3,25,000 68,000 3,00,000 ‘Scrapped and disposed off for & 80,000. The value of Plant at site on 31% March 2018 was % 2,50,000 and the Bbeptee anne erapta cas irsied on ooctrtnvcan we © 090008 preening Wes cae oneal ‘Cost of Work Uncertified was valued at 5,40,000. q Estimated further expenditure for completion of contract is as follows: ‘+ An additional amount of & 4,62,500 would have to be spent on the Plant, and the Residual Value of the Plant on! ‘completion of the contract would be ® 67,500. ‘+ Site Office Expenses would be the same amount per month as charged in the previous year. ‘+ _ Anamount of € 1,57,500 would have to be incurred towards Consultancy Charges. ‘Required: Prepare Contract Account and calculate the Estimated Total Profit on this contract, 1, Statement of Current & Total Profits Till date Additional = 45,00,000 Given = _5,40,000 50,40,000 12,02,000 21,73,000 40,03,800 12,60,000 2,57,000 6,08,000 4,20,000 6,45,000 (3,00,000%21/12)=5,25,000 = 57,500 36,00,000 80%l | oo Soe Soot of snr] ———___ Ap 200 we 3° 29] Stock ‘Stock-Cost of | a = NU-+ 15,30,000 ~73,000 - 255 99 Opening Stock + Issues ~ Closing Stock at we e 12,02,000 = 73,000 + 21,00,000~ Nil = 21,73,000 Paid + 0/5 at end | aid daring he ~ OS at beginning | = 10,12,500 + 80,000 = 6,92 500 ste 150000 ee Be ~ Prepaid at end Prepaid of prev. ring 5325000 = 68,000 = 2,57,000 rae mee scan 5 ~ Residual Value Opening Purchases — Residual = 7,50,000 = 80,000 ~ 2,50,000 = 4,20,000 a 250,00 4a = 67 500-= $00 Tis assumed that Plant scrapped and disposed 00 Here, Loss| Gen ees ce Of for ® 80,000 at cost. Hence Los / Gan thereon s oro Sontract Account for the year ending 31* 2018 [see br sea pecan, wth Mtl oe e Particulars z 12,02,000 | By Work in Progress 10,92,500 | -Work certned poe een 2,57,000 | -Work Uncetifed 540,000 4,20,000 3,00,000 17,68,500 50,40,000 Total 50,40,000 )Profit and Loss A/c transfer (Note) 4,11,967 | By Notional Profit b/d 17,68,500 Reserve Profit c/d (bal figure) 13,56,533 — 17,68,500 Total 17,88,500 WP 50,40,000 | By Reserve Profit b/d 1356533 ‘of Completion = 45%. Least ofthe following Is transferred to PAL stated Total Profit x Work Certified ‘AVc (on prudence / conservatism basis) = ConREraE = 13,60,000 x “5 = 6,12,000 Estimated Total Profit x ak corte > Gah Recon = 1360000 x Sx som = 489,600 Total Prot x Cost ate = 13.6000 x 71S = 514.958 el lista Cos * Wok Cather ~ 1940000" 52ST wane aang67 45 = 17,68,500 x 5 = 7,95,825 z = * Nan rot x ish Received = 7% 17,68,500 » 80% = 4,73,600 1 for € 39,7, 500. twas decided to ‘commenced a contract on 1" ‘of Year 1, The Total Contract was en. the Te Pra conic rue oes ae crt 2 mona Apt Maran ich wor cote ba Teal Contact. Atal Expand fr Yer xpenditure for Year 2 (5 months 1* Apri to 31% August) are given below ~ 8.27 Scanned with CamScannershe tieae ‘Plant is subject to annual depreciation at 33% on WOV Method. The Contract is likely to be completed on [Reguire: Prepare the Contract Account. Determine the profit on the contract for Year 1 on prudent basis, which hg ‘credited to P & L Account. 1. Statement of Till date Given = 20,00,000 Given = _ 75,000 20,75,000 6,00,000 12,75,000 4,25,000 590,000 2,50,000 3,25,000 109,313 27,638 13,84,313, 22,17,638 Notional Profit = 6,90,687 es (©. Profit transfer to PB A/c (based on formula specified in the question) Work Certfied | Cash Re ceived ¥ 20,00,000 | & 1750.000 Scenes Ta Plex read ree * Werk Catihed:“* 29549 * © 3937500 * 2000000 7°48 Year 2 (5 montis), Opening Stock+ Issues ~ Closing Soa Prepaid of last year + paid during the year + 38% = 25,000 +5,62,500 +2,500 = 5340 Paid during the year + o/s at end — o/s at begins 3, 0 = 2,50, for 12 months = 99,000 75/000 * 33% for 5 months = 10,313 Total = 1,09,313 By Work in Progress Work cated Materials at siteum of #100 00 The work was started 18.00 Iocan cycle shed for 8 er fount yg 18: Sundry xpenaes = 1,325, €stablihment Charge © 2925 31" March 20%, wa {or the contract and were immediately sold for ® 2,625. Te work ncaa A tors ¢ 0, coh raced on account was € 35.00 representing estimate the further valved at 5475 and tis was certified later for € 6,250. othe oa estiaad prom son othe contrac and otk othe cat ok PAL Al or wore made: Work certified, bore tothe total contract price. I pe cotact Would ake a further 9 months {rae ay oe inured wore & 17475, ‘of Stores required in addition Fe Coses of 1500 woul! be ncaa? 0 complete, {hove In stock on 314 March 20X2 would be © 47,80 andthe further Sur Sng Contract, Stores and Plant Accou Peto Prof Loss Account forthe year "3 de 31 March 202 and also show your calcuations forthe amount 4, Statement of Current & Total Profits Till date | Additional | Terai | 35,000 = 43,750 =] 1,00,L00 | 5,475 = =| 49,225, | 1,00,000 | | 14,150 18,000 32,150, 16,250, 17,875 LS bh 1,325 1,500 2.825 ‘Esablshment Charges 2,925 2194 5,19 citi 3,450 7,050 10,500 Sub-Total Cost excluding Contingencies 38,100 46,619 84,719 Contingencies (2.5% of 8 84,719) 2 2.118 2,118 | Total 38,100 | 48,737 86,837 11,125 13,163 Notional Profit Estimated Total Profit ransfer to P&L A/c (based on formula specified inthe question) siete Work Certiied - Estimated Total Profitx fie. =f 13.163 zaqaqg 7°75 8.29 Scanned with CamScanner= 18,000 = 3,000 - 850 = 14,150 | (©) Establishment Charges €2,925 (given) for 12 months | (©) Depreciation Cost Less Residual Value = 5,000 ~ 1,550 = © 3,450 _________2. Contract Account for the year ended 31 March 20%2 Particulars £ Particulars To Materials Issued 18,000 | By Work-in-Progress - Work Certified To Wages 16,250 = Work Uncertified ‘To Sundry Expenses 41,325 | By balances cd. ~ Plant ‘To Establishment Charges 2,925 ~ Materials To Plant 5,000 | By Bank ~ Sale Value of Material Sold To Notional Profit oid 11,125 | By P&L (Loss on Materials) (3,000 ~ 2,625) Total 54,625 Total ‘To PAL A/c Profit transfer as per WN 1 above 5,759 | By Notional Profit c/d ‘To Reserve Profit c/d — balancing figure 5,366 Total 14,125, Total ‘To WIP b/d (WC + WUC) (43,750 + 5,475) 49,225 | By Reserve Profit b/d To Piant at Ste bya 1,550 To Materials at site b/d 850 Note: “Loss on Sale of Material will be debited separately to P & L Account. Also, Work Uncertified later for ® 6,250 will be considered in the subsequent period's accounts. 21, multiple Contracts ~Proft Loss Combinations ~Columnar Contract Accounts Siti i undertaking a number of contracts, Sed ee Particulars / Contract No. 7233 726 T2 ‘Total Contract Price B20 14.40 10.08 Estimated Total Costs on the Contract 20.50 11.52 12.60 Expenses for the year ended 31* March a saa 5.22 1.80 1.98 Wages 232 42 390 Overheads (excluding Depreciation) 1.06 260 22 Profit Reserve as on Api (begining) 4.80 Plant issued at Cost during te yar 5.00 350 28 Materials at Site as at 1 Apri os : Materials a Site asa 3 March (end) 04s 2 = Mon Coes eg gin 475 te 8 = Te as caste 276 Mot Uncritd ason 31¢Mach on) hy bu ie PreresPemansrecaed dng he yar f ie i 957 100 875 ryan tun be cae Contracts were the year ended 3 Mare a ‘eet ates a ad tom Scanned with CamScanner_ Contract Costing contract Recount fr the year ended 31% March a 7an| 726 729] 731] Total] puinoes “| 9373s] 7a9 | 7am] oa 5 3 a on By Reserve b/d 1.50 -l = =} 150 ~| =| =! 0.75 | By WIP a/c rf 1.98 | 0.80 | 9,80 | -Work Certified | 17.51| 13.26| 7.56| 432) 42.65 132 | 3.90 | 2.16 | 12.70 | -Work Uncertiied | 0,84} 0.24| 0.14| 0.18] 1.40 2.60 | 2.62 | 1.05] 7,33 | By balance o/d 0.70 | 0.55 | 0.60} 2.85 | -Materials 045! 0.20| 0.08} 0.05) 0.78 428| =| =| 9.48 | By toss ¢/6 =| =| 127| 006] 133 20.30 | 13.70 | 9.05 | 4.61 | 47.66 Total 20.30 | 13.70 | 9.05 | 4.61 | 47.66 = =| 1.27] 0.06 | 1.33 | By Notional 520], 428; = -| 948 130] 156] -| -| 286 Profit b/d 390| 272] -| -| 662] ByPaL-Lossur| -| =| 252| 006) 258 = =| 125] -| 125 5.20 | 4.28 | 2.52 | 0.06 | 12.06 Total 5.20| 4.28 | 252| 0.06 | 12.06 rat (\ass) tobe transfered to PRL Nis determined on prudence basis, as per WN 2 below. * resect of profit-making contracts, the balance profit is called "Reserve Profit”, while in respect of ‘Eutecs the balance Is called “Provision against Future Losses" (or) “Reserve for Contingencies”. Both Reserve and Sovson constitute Credit balances, and are treated in the same way while disclosing WAP in the Balance Sheet. Current Loss is 1.27 whereas the Worst Loss of 2.52 is to be provided for. The balance 1.25 constitutes « InContrect 729, 52 provision for foreseen losses ‘and is hence carried forward as “Provision” (not Reserve Profit). «Teal Column is only for information value. 2. Recognition of Profit / Loss on Incomplete Contracts (in € Lakhs) _ Contract Number 723 726 729° 734 ‘@Gontract Price 23.20 14.40 10.08 28.80, (D)Work Certified (cumulative) 17.51 13.26 756 E 432 (@ecentage of Completion = 2 75% 92% 75% 15% a : ftal Costs (given) 20.50 1152 12.60 | 760 Eitimated Total Profit = (2) ~(6) 2.70 2.88 (252) 720 lNetonal Profit (as per Contract A/c) 5.20 4.28 (2.27) 70.06) @ Least of the | Leastofthe | Worst Loss | Current Loss ‘Transfer to P & L Account (See below) following 1.30 | following 1.56 (2.52) (0.06) ferred to PAL No.723 nd 726, least ofthe following is tra ce Work 175). 2.00 arc vi Wem ,, Work Certiied ceived 47.51 , 9:57. 0 4.89 tore” wok Cred 2.70 * 950 * 12.78 Oem, Cost tit date a70xiee 9473 ee zh =, 957 ep x Cost ti date Cosh Recaved |979 4 AE « B= 490 Scanned with CamScannereats Suderts Handbook on Coton Managemen Accounting = Ft A (Note: In the above formulae ~ ° a a sot) cont data = WIP (WC + WAX) less Noten Prt ar Caras NE “Work Certified | eymutative Work Certified should be considered ‘« For calculating percentage of completion, i. aria for considering the percentage of Including Opening balance of Work Certfied.). However, \ CasNReCved yon eceved dr tat yor shouldbe compared with Wak Careted uring Ch ea Work Certified ‘excluding Opening balance of Work Certified.) ‘22 ‘Columnar Contract Accounts = Prof RECOGNI ng info hte ‘The following {ABC Lid, a Construction Company, has undertaken three con Particulars 7 Contract A ‘Contract Price ie Balance bid at the beginning of the year ~ Materials on Site a —WDV of Plant and Machinery s Wages accrued zs ‘Transactions during previous year Profit previously transferred to P&L Gost of Work Certified (Cost of Sales) ‘Transactions during current year Materials delivered to site 8 Wages Paid 5 = Salaries and Other Cost 5 ~WDV of Plant issued to Site 1,90 - HO Expenses apportioned for the year Balances cffd atthe end of the year ~ Materials on Site 2» = WDV of Plant and Machinery 4,50 = Wages accrued 5 Value of Work Certified at end of year 200 ‘Cost of Work not certified at end of year - = the Contractee’s Architect. Contract C is scheduled to be “The agreed retention is 10% of the Value of Work Certified by Ta Sn tea ture estimated tat € 305,00 shall be needed tobe spent in aden t we been tabulated above, to complete this particular contract. ‘This amount includes an allowance fr Plant Depreciation, Construction Services and for Contingencies. prepa Conract Nes foreach le thee conracs and recommend how much Poft Los shoud be recognize or D8 Solution: 1. Contract for the year (in € ‘000s) Particulars: al B c Particulars A To balances b/d By balances b/d ‘Work Certified (See Note) =| 4,18] 8,49} — Wages Payable - Materials at site -| 2} 9 WOW of Plant =| — 77| 3,74 | By Work-in-Progress ‘To Materials (for the year) 6} 2,20| 3,96| — Work Certified 2,00 areeuii ter 45| 1,00] 2,20] Work Uncertified > Wages Payable 5| 10] 15 | By balances To Salaries & Other Cost 15} 40] 50 aon ic a 20 ee 1,90 35, =| WOV of Plant 1,50 HO Expenses 10] 20] 50 | By Loss cfd (bal. figure) ” To\Notional Profit c/d (b/f) w ~| 411 Total 3,70| 9,40 | 23,95 Total [3,70 7 ase Scanned with CamScannera7. Loss (55) Ls (55) | Based on Prudence, (<.259 oo Current Loss shown below. culated as under — jet vearProft | = as per Contract AVe above St = Cost upto last year + Cost this year = _814__+ (30+374+396+220+15+50+50-10-230) 17,08 | = Costs til date (as above) + Further Costs to be incurred = 17,08 + 3,05 | 20,14 = Contract Price (less) Estimated Total Costs = 24,20 - 20,14 = Least of the following (a) to (Q) 'do you mean by Contract Costing? the features of Contract Costing, _N 95 1d you mean by Cost Plus Contract? List its merits and demerits, RTP, N 96, N 0, M 08, N08, W 08, M16 io you mean by Escalation Clause?” M95,N00,MOZNOTLNIQMI8 ot 033 CISIEIEIERIEEIEER Scanned with CamScanner‘Scanned with CamScanner