Contract Costing

(Part-V/ Chapter-1)

Dr. Asif Hasan

(Assistant Professor)
Department of Finance
IBS HYDERABAD.
 Topics to discuss

01 Meaning of Contract 02 Features of Contract 03 Applications of

Costing Costing Contract Costing

Job Costing Vs Work Certified Vs Retention Money

04 05 06
Contract Costing Work Uncertified

07 08 09
Notional Profit
 Meaning of Contract Costing
• Contract costing is a form of specific order costing which applies where work is
undertaken to customer's special requirements and each order is of a long duration.

• Contract costing is one of the methods of job costing and it is also called terminal
costing. In this, each contract is given a number and the records are maintained
separately. This method is generally used by builders, construction firms, contractors
etc.

• Contract costing is the tracking of costs associated with a specific contract with a
customer.
 Features of Contract Costing

• Contracts are generally of large size and, therefore, a contractor usually carries out
a small number of contracts at a particular point of time.

• A contract generally takes more than one year to complete,

• Work on contracts is carried out at the site of contracts and not in factory
premises.

• Each contract undertaken is treated a cost unit.

• A separate contract account is prepared for each contract in the books of

contractor to ascertain profit or loss on each contract.
 Features of Contract Costing
• Most of the materials are specially purchased for each contract. These will,
therefore, be charged direct from the suppliers invoices. Any materials drawn
from the store are charged to contract on the basis of material requisition notes.

• Nearly all labour cost will be direct.

• Most expenses (electricity, telephone, insurance, etc.) are also direct.

• Specialist sub-contractors may be employed for example, electrical fittings,

welding work, glass work etc.

• Plant and equipment may be purchased for the contract or may be hired for the
duration of the contract.
 Features of Contract Costing

• Payments by the customer (contractee) are made at various stages or completion

of the contract based on architect's certificate for the completed stage. An amount,
known as retention money, is withheld by the contractee as per agreed terms.

• Penalties may be incurred by the contractor for failing to complete the work
within the agreed period.
 Application of Contract Costing

Contract costing is mainly applied in;

• Building constructions

• Civil engineering projects

• Ship building

• Road and railway line contracts

• Construction of bridges
 Difference between Job Costing and Contract Costing
• Contract costing is generally big while job costing is small. It is well said, "a job
is a small contract and a contract is a big job."

• The number of jobs undertaken at a time are usually large as compared to number
of contracts because contracts are generally much bigger in size.

• In contract costing most of the costs are chargeable direct to contract accounts.
Under job costing, direct allocation to such an extent is not possible.

• Allocation and apportionment of overhead costs is simpler in contract costing as

compared to job costing.

• Jobs are usually carried out in factory premises while contract work is done at site.
 Notional Profit

• Notional profit is the difference between the value of work-in-progress certified

and the. cost of such work-in-progress certified. It is computed as follows.

Value of work certified 20,00,000

Add: Cost of work not yet certified 1,50,000
21,50,000
Less : Cost of work to date 19,00,000
Notional profit 2,50,000
 Estimated Profit

• Estimated profit represents the excess of the contract price over the estimated total
cost of the contract. It is computed as follows

Particulars Amount
Contract Price 30,00,000
Less Total cost already incurred 21,00,000
9,00,000
Less: Estimated additional costs to complete the contract 3,50,000
Estimated Profit 5,50,000
 Work Certified Vs Work Uncertified
• Work certified is the work completed and certified by the engineer and work
uncertified is that which is completed but not certified by the engineer.

• Any part of construction which is completed by contractor will be work certified

if it is certified by an authority. Authority may be independent engineer or
architect who can estimated the work. He will issue the certificate of work done
after certifying the work of construction. On this work certified, contractor has
right to get money of contract.

• Work certified and work uncertified are part of work in progress and to be
recorded in contract account.
 Accounting Treatment of Work Certified and Work Uncertified 
(I) Work  certified and work uncertified will  go to the credit side of contract
account. Why?

• Main reason of this, contract account is just like income and expenditure account.
We show all expenses of contract in its debit side and all income in its credit side.
Work certified and work uncertified are just like outstanding income.

(II) Work certified and work uncertified will go to the asset side of balance
sheet. Why?

• Because both are outstanding income of contractor. But deduct cash received and
reserves from it because cash received will become income of current, so it will
not include in balance sheet.
 Retention Money

• Work uncertified means work done but not certified by authority. So, contractee
will cut some money on the basis of work uncertified and will keep in his pocket.
This will be retention money.
Problem: Contract Costing

• The following was the expenditure on a contract for Rs 6,00,000 commenced in

January, 2014.
Particulars Amount
Materials 1,20,000
Wages 1,64,000
Plant 20,000
Business Charges 8,600

• Cash received on account of the contract up to 31st December was 2,40,000 being 80% of the
work certified.
• The value of materials in hand was Rs 10,000.
• Prepare Contract A/c for 2014 showing the profit to be credited to Profit and Loss A/c.
• Plant is to be depreciated at 10%.
 Solution: Contract A/c
Particular Amt Rs. Particular Amt Rs.

To Materials 1,20,000 By material in hand 10,000

To Wages 1,64,000 By Plant 20,000
To Plant 20,000 Less: Depreciation 2000 18,000
To Business Charges 8,600 By Work in Progress
To Notional Profit C/d 15,400 Work Certified 3,00,000
Work Uncertified 0

3,28,000 3,28,000

To Profit & Loss A/c (15400 * 2/3 8,214

*240000/300000)
To WIP Reserve 7186 By notional profit b/d 15,400

15,400 15,400
Problem: Contract Costing

contractor undertook a contract on 1st January, 2014 and incurred the following expenses:

The contract was finished on 30th November, 2014 but it could not be considered as completed until
the maintenance period of 6 months had expired on 31st May, 2015. The cost of maintenance is
estimated to be Rs 3,000. Prepare the Contract A/c.
Solution: Contract A/c

Particular Amt Rs. Particular Amt Rs.

To Materials 35,000 By Plant at end 7,500

To Wages 12,500 By Materials returned to stores 2,000
To Plant 10,000 By contractee 75,000
To Direct Expenses 5,000
To Indirect Expenses 2,000
To Maintenance 3,000
To Profit 17,000
84,500 84,500
Problem: Contract Costing

AB Limited took a construction contract in 2014. The contract price was Rs

5,00,000. At the end of 2014, the company has received Rs 1,80,000 representing
90% of work certified. Work not yet certified had cost Rs 5,000. Expenditures
incurred on the contract during 2014 was: materials Rs 25,000; labour Rs1,50,000;
plant Rs 10,000. Material costing Rs 2,500 were damaged and had to be disposed for
Rs 500. Plant is considered as having depreciated by 25%. Prepare Contract A/c for
2014 showing the profit to be credited to Profit & Loss A/c.
Solution: Contract A/c
Problem: Contract Costing
• On 1st January A undertook a contract for Rs 5,00,000. He incurred the following expenses during
the year:
Particulars Amount
Materials issued from stores 50,000
Materials purchased for the contract 45,000
Plant installed at cost 35,000
Wages paid 100,000
Wages accrued due on 31st Dec. 40,000
Direct expenses paid 10,000
Direct Expenses accrued due on 31st Dec 2,500
Establishment 6,500
• Of the plant and materials charged to the contract, the plant which cost Rs 2,000 and the materials
costing Rs 1,500 were lost.
• On 31st December, the plant which cost Rs 500 was returned the stores, and a part of the plant
which cost Rs 200 was damaged rendering itself useless.
• The work certified was Rs 2,40,000 and 80% of the same was received in cash.
Solution: Contract A/c
THANK YOU.