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Contract Costing: Contract Costing is a method used in construction industry to ﬁ nd out the cost and proﬁ t of a particular construction assignment. The principles of job costing are also applicable in contract costing. In fact Contract Costing can be termed as an extension of Job Costing as each contract is nothing but a job completed. Contract Costing is used by concerns like construction ﬁ rms, civil engineering contractors, and engineering ﬁ rms. One of the important features of contract costing is that most of the expenses can be traced to a particular contract. Those expenses that cannot be traced to a particular contract are apportioned to the contract on some suitable basis. The cost computation in case of a contract is done on the following basis. A. Material Cost: Direct Material required for a particular contract is debited to the Contract Account. There may be some quantity of material which is returned back to the store. In such cases, material returned note is prepared and is either credited to the Contract Account or deducted from the material debited to the Contract Account. Similar treatment is given to the material transferred from one contract to another one. Material Transfer Note is prepared to record these transactions of transfer. Material remaining at the site at the end of a particular accounting period is shown as closing stock after valuation of the same and carried forward to the next period. B. Labor Cost: Wages paid to the workers engaged on a particular contract should be charged to that contract irrespective of the work performed by them. If there are common workers on more than one
For removing this drawback. the contract is credited with the depreciated [revalued amount] value]. The main drawback of this method is that the debit side of the contract account is unnecessarily inﬂ ated with the cost of the plant value and thus the cost of contract is shown very high. the difference between the original cost at the commencement of the contract and the depreciated value at the end of the period is worked out and charged to the contract account as depreciation.contract and/or if the workers are transferred from one contract to the other contract. After the completion of the contract. If a plant is specially purchased for a particular contract and is expected to be used for the contract for long time.Job.128 Methods of Costing . they should be charged to the contract on some suitable basis. thus being exhausted at site. their wages can be apportioned to a particular contract on suitable basis like time spent etc. The depreciation may be charged on any of the following basis. Thus the amount of depreciation is debited to the contract account. Some of the workers may be working in the central ofﬁ ce or central stores. Expenses: All expenses incurred for a particular contract should be charged to that contract. D. If it is not sold. Plant and Machinery: Depreciation on the plant and machinery used for the contract is to be charged to the contract account. In case of any indirect expenses incurred for the organization as a whole. the total cost of the plant will be debited to the contract account. it will be sold at the site itself and the sale proceeds are credited to the contract account. time sheets must be maintained and wages may be distributed on the basis of time spent on each contract. Batch and Contract Costing C. . Direct expenses can be charged directly to the contract. if it is no longer required.
Material supplied to the sub contractor without any charge. The hourly rate is calculated by dividing the depreciation and other operating expenses of the plant by the total estimated working hours of the plant. Rent received for the use of such tools and machines should be credited to the contract account or deducted from the ﬁ nal bill of the sub contractor. Subcontract: Sometimes due to certain situations.If a plant is used for a contract for a short period. Special Aspects Of Contract Account: There are certain special aspects of contract accounts. there is no need of debiting the cost of the plant to the contract account. Additional Work: Sometimes additional work may be necessary in addition to the work originally contracted for. The amount of depreciation is worked out on the basis of per hour and charged to the contract on that basis. Sometimes plants may be taken on hire for a particular contract. a sub contractor is appointed to carry out certain special work for the main contract. a subsidiary contract is generally entered into with the contract. These . tools etc supplied to him on rent should be depreciated on appropriate basis and debited to the contract account. In such cases the amount of rent paid should be debited to the contract account. VII. VI. This forms a separate charge and if the amount involved is large. The payments made to the sub contractor are charged to the main contract as direct expenses and no detailed break up of the same is required. is debited to the contract account as direct material and machinery. V. This special work done by the sub contractor becomes a direct charge to the main contract and accordingly debited to the contract account.
Certiﬁ ed Work: In contracts which are expected to continue for a long period of time. any of the following two methods may be usedI. if none of the contracts are completed. Thus there will be distortions in the amount of proﬁ ts. The questions arises as to whether the proﬁ ts on such contracts should be taken into consideration after the completion of the contract or whether a portion of the same should be taken into accounts every year on certain basis. In the second method. the contract account is credited with the value of the certiﬁ cate and the contractee’s account is debited with amount payable immediately and a special retention money account is debited with the amount so retained. II. Therefore it becomes necessary to compute the amount of proﬁ t on partly completed contracts and take credit of appropriate amount in the proﬁ t and loss account by using the following guidelines. Treatment of Proﬁ t on incomplete Proﬁ t: Several contracts take more time than one ﬁ nancial year before they are complete. The amount received by the contractor is not 100% of the value of the work certiﬁ ed but is less than the same. it is a normal practice that the contractor obtains certain sums from the contractee from time to time. If proﬁ t is taken into consideration after the completion of contracts and if in a single year several contracts are completed. Value of certiﬁ ed work only should be taken into consideration while determining the proﬁ t. as the balance amount is kept as retention money. For recording this transaction.are discussed below. In the ﬁ rst method. amount of proﬁ ts shown will be very low. This is done on the value of contract completed and certiﬁ ed by the architect/surveyor appointed by the contractee. the proﬁ ts shown will be very high while in another year. . the contract account is credited with the value mentioned in the certiﬁ cate and personal account of the contractee is debited. Cash received is credited with the contractee’s account and the balance is shown as a debtor representing the retention money.
the estimated total proﬁ t is ﬁ rst determined by deducting the total costs to date and additional expenditure necessary to complete the contract from the contract price. In case. 2/3 Notional Proﬁ t X Cash Received/Work Certiﬁ ed In case of contracts completed 90% or more than that. it is considered to be almost complete. the following method should be used for computing the proﬁ t to be credited to the Proﬁ t and Loss Account. In such cases. In case of contracts which are less than 25% complete.Estimated Proﬁ t X Work Certiﬁ ed /Contract Price Method II:. In case of contracts which are more than 25% complete. no proﬁ ts should be taken into consideration and consequently no credit should be taken to Proﬁ t and Loss Account. but less than 50% complete.Estimated Proﬁ t X Work Certiﬁ ed /Contract Price Cash Received/Work Certiﬁ ed or Estimated Proﬁ t Cash Received/Work Certiﬁ ed. The portion of proﬁ t so arrived is credited to the Proﬁ t and Loss Account by using the following formula. It is computed in the following manner. Method I:. the amount of proﬁ t to be transferred to the Proﬁ t and Loss Account is determined using the following formula. The method II is preferable to the ﬁ rst one.Job. 1/3 Notional Proﬁ t/ Cash Received/Work Certiﬁ ed. Batch and Contract Costing . Notional Proﬁ t = Value of work certiﬁ ed – [cost of work to date – cost of work completed but not certiﬁ ed] In case of contracts complete between 50% and 90% [more than 50% but less than 90%] the following method is used for computing the proﬁ t to be credited to the Proﬁ t and Loss Account. Notional Proﬁ t Work Certiﬁ ed/Contract Price130 Methods of Costing . additional expenditure to complete the contract not mentioned. Notional proﬁ t is the difference between the value of work certiﬁ ed and cost of work certiﬁ ed.Value of work not certiﬁ ed should not be taken into consideration.
] Total expenditure to date 1.000 Work uncertiﬁ ed 10. 20. Before computing the same. 400 Contract price 1. 1. The reason is that this being unrealized proﬁ ts should not be used for distribution of dividend. 600 Less: Expenditure to date: Rs. 920 Solution: The amount of proﬁ t on incomplete contract can be computed according to any of the following four methods. 400 .000 Estimated further expenditure to complete the contract [including contingencies] 20. 000 Estimated further expenditure: Rs. 02. 400 Total expenditure Rs. the total amount of loss should be transferred to the Proﬁ t and Loss Account by crediting the contract account.600 Work certiﬁ ed 1. Similarly. 83. the principle of conservatism should also be applied in computing and crediting the proﬁ ts. we will compute the amount of proﬁ t on the contract and then show the working of the methods. 200 Cash received 97. Proﬁ ts on incomplete contract: Total Contract Price: Rs. 83. It will be observed that in case of incomplete contract. Illustrate at least four methods of computing the proﬁ t. 02. Particulars Amount [Rs. amount of proﬁ t credited to the Proﬁ t and Loss Account is reduced proportionate to the work certiﬁ ed and cash received. 1. 20. 1. Illustration: Compute a conservative estimate of proﬁ t on a contract [80% complete] from the following particulars.If there is a loss. 22.
102000/Rs.97920/120000 = Rs.102000/Rs.120000/Rs.41616131 Cost and Management Accounting Special Points in Contract: I.122400 Rs. However in order to avoid any dispute in future. These types of contracts give protection to the contractor against ﬂ uctuations in proﬁ ts as he is guaranteed about his proﬁ t irrespective of the actual costs.51000 o 4th Method: Estimated Proﬁ ts Cost of Work to Date/Estimated Total Cost Cash Received /Work Certiﬁ ed o Rs.61200 Rs.61. the contractor receives his total cost plus a proﬁ t. which may be a percentage of cost.120000 = Rs.183600 Rs.183600 Rs.Estimated Proﬁ ts Rs. it is always advisable to specify the admissible costs in advance. In this type of contract. Similarly the customer may also reserve the right of demanding ‘cost audit’ in order to check the reliability of the claim of the contractor regarding increase in the costs. Target.122400 = Rs. 000 o 2nd Method: Estimated Proﬁ ts Work Certiﬁ ed/Contract Price Cash Received/Work Certiﬁ ed o Rs. Cost Plus Contracts: This type of contract is generally adopted when the probable cost of contract cannot be ascertained in advance with reasonable accuracy.32640 o 3rd Method: Estimated Proﬁ ts Cost of Work to date/Estimated Total Cost o Rs.97920/Rs.120000 = Rs.61.61200 Rs.61200 Rs.price contracts: In such cases. the contractor receives an agreed sum of proﬁ t over his pre- .40. II. 200/Rs. 200 o Amount of Proﬁ t to be taken to the Proﬁ t & Loss A/c o 1st Method: Rs.
Escalation Clause: In order to protect the contractor from the rise in the price. The condition that may be laid down is that the contractor will have to produce a proof regarding the rise in the price. a ﬁ gure is agreed as the target ﬁ gure and if actual costs are below this target. . the contract price is increased proportionately if there is a rise in input costs like material. an escalation clause may be inserted in the contract. labor or overheads. the contractor is eligible for bonus for the savings. In addition.determined costs. III. As per this clause.