Contract Costing

Contract Costing is that form of specific order

costing where the work is undertaken
according to customer’s requirement and each
order is of long duration as compared to job
costing.
The work is generally of constructional in
nature .
 Features of Contract Costing
Contract Costing is usually adopted by
contractors engaged in type of contract like
construction of building, road, bridge, Reapir
of tower, setting up plants etc. Following are
features of contract costing
1. The major part the of work in connection to
each contract is ordinarily carried out at the
site of the contract
 Cont…d
2. The bulk of the expenses incurred by the
contractor are considered as direct
3. The indirect expenses mostly consist of office
expenses , stores and works
4. A separate account is usually maintained for
each contract
5. Each contract is treated as a separate cost
unit under contract costing
Terminologies in Contract Costing

Contract-A contract is legally binding

document that recognizes and governs the rights
and duties of the parties to the agreement
Contractor- A contractor is person or company
that performs work on contract basis.
Contractee- Contractee is a party to the
construction contract who is not the contractor,
frequently the owner
 Cont..d
Contract Price- It is the consideration between
contractor and contractee for undertaking the work.
Work Certified – Work Certified is that portion of
work completed which has been certified or valued
by architect or surveyor.
Work Uncertified – Work Uncertified is that part of
the work completed which has not been certified or
approved by contractee’s architect or surveyor
 Cont..d
Notional Profit- Notional profit is an estimate
of earnings primarily used on building and
construction industry. It is used to smooth out
fluctuations in reported revenue due to
contacts that take a long time to complete.
It is calculated by following equation
Notional Profit = Work in Progress - Cost incurred to date
 Cont…d
Escalation clause – An Escalation clause is clause in
a contract that guarantees a change in agreement price
once a particular beyond the control of either party.
This clause authorizes the contractor to claim higher
value.
De-escalation clause- De-escalation clause is the
opposite of an escalation clause. This clause in a
contract calls for a price decrease if there is decrease
in certain costs.
 Adjustment of Notional Profit

1. If work completed is less than or equal to 1/4 of total work ,

no profit shall be transferred to P/L Account.
2. If work completed is more than 1/4 but less than 1/2 of total
work , then 1/3 of notional profit shall be transferred to P/L
Account
3. If work completed is between 50 % to 90% , then 2/3 of
notional profit shall be transferred to P/L Account.
4. If the work is nearing completion means between 91% to
99%, total estimated profit shall be transferred to P/L A/c
N:B- The amount of profit is further reduced in the ratio of cash
received to the value work certified .
 Example 1
The following was expenditure on contract for
Rs.6,00,000 started in January , 2019:
Materials Rs. 1,20,000; Wages Rs. 1,64,400; Plant Rs.
20,000; Business charges Rs.8,600.
Cash received in 31 December ,2019 amounted to Rs,
2,40,000 being 80% of work certified; the value of
material in hand on 31/12/2019 was Rs. 10,000.
Prepare Contract Account for 2019 showing the profit
to be credited to P/L A/c. The plant is to be
depreciated at 10%.
 Dr Contract Account Cr

Particulars Amount Particulars Amount

(Rs) (Rs)

To Material a/c 1,20,000 By Plant in hand a/c 20,000

To wages a/c 1,64,400 Less: Depreciation 2,000 18,000
To Plant a/c 20,000 By Material in hand a/c 10,000
To Business charges a/c 8,600 By Work-in – Progress a/c 3,00,000
To Notional Profit c/d 15,000 (240,000x 100/80)

3,28,000 3,28,000
To Profit & Loss a/c By Notional Profit b/d
[(2/3)x15000x(80/100)] 8,000 15,000
To WIP reserve a/c
7,000
15,000 15,000
 Example 2
BBC Construction Ltd. has obtained a contract for the construction of
a bridge. The value of the contract is Rs. 12,00,000 and the work
commenced on 1st Jan 2019. The following details are shown in their
books for the years ended 31 Dec 2019.
Plant purchased Rs. 60,000; Wages paid Rs.3,40,000 ; Material
issued to site Rs. 3,36,000 ; Site expenses Rs.8,000 ; General
overhead apportioned Rs. 32,000 ; Wage outstanding Rs.2,800;
Materials at the site on 31.12.2019 Rs. 4,000 ; Direct expenses
accrued as on 31.12.2019 Rs. 1,200 ; Work not yet certified at cost
Rs. 14,000 ; Cash received being 80 % of work certified Rs.
6,00,000. Life of plant purchased is 5 years and scrap value is nil.
(1) Prepare the contract account for the year ended 31 Dec 2019, (2)
Show the amount of profit to be transfer to P/L account.
Dr Contract Account Cr

Particulars Amount (RS) Particulars Amount (Rs)

To Material issued a/c 3,36,000 By Material at end a/c 4,000
To Wages a/c 3,40,000 By Work –in Progress a/c:
Add- O. Wages 2,800 3,42,800 Work certified:
To Site expenses a/c 8,000 (100/80) x 6,00,000=
To General overhead a/c 32,000 7,50,000
To Direct exp.accrued a/c 1,200 Work uncertified: 14,000
To Depreciation on Plant 12,000 7,64,000
( 60,000/5)
To Notional Profit c/d 36,000
7,68,000 7 68,000
To Profit & Loss a/c 19,200 By Notional Profit b/d 36,000
2/3(80/100 x 36,000)
To WIP Reserve a/c 16,800

36,000 36,000
 Example 3
Surya Construction (P) Ltd undertook a contract to construct a MIG
apartment. The work started on 1st April 2019. The contract price is Rs.
60,00,000. Cash received on account of the contract up to 31 st March 2020
is Rs. 18,00,000 (being 90% of the work certified ). Work completed but
not certified is estimated at Rs. 1,00,000. As on 31st March 2020 material at
site is Rs.30,000. Following details are given :
Plant & Machinery Rs.15,00,000
Materials Rs. 14,00,000
Wages Rs. 2,55,000
Fuel and Power Rs. 1,25,000
Site expenses Rs. 5000
Office expenses Rs. 12,000
Rates & Taxes Rs. 15,000
Depreciation on Plant & Machinery 5 % p.a. Prepare Contract Account