CONTRACT COSTING

Session 18 – 20

By,

Ipsita Mishra

DEFINITION…

Contract Costing is that form of specific order costing

which applies where work is undertaken to

customer’s special requirements and each order is of

long term duration.

FEATURES OF A CONTRACT …

Contracts are undertaken to special

requirements of the customers.

Duration of Contracts are relatively for a longer

period.

Contract work is done on the sites unlike

manufacturing under a roof.

Contract work mainly consists of construction

activities.

PROCEDURE FOR CONTRACT COSTING:

A separate contract account is maintained for each contract.

Accounting for each item of cost is shown below :

Material : Value of Material sent to site is debited to contract account.

Materials if returned to stores or lying at site unused or materials transfers to another contract site is credited to the contract account.

CONTD…

Labour – Total wages including outstanding

wages are debited to the contract account.

Plant - the hire charges of plant are charged to

contract account.

Method 1 - Value of the plant sent to site is to be

debited . The value of plant returned to the site is

credited to the contract account.

Method 2 – Instead of showing the value of plant

issued to site and that remaining at site at the end

of year, depreciation of plant can be directed

debited to the contract account.

CONTD..

Work Certified : The work that has been

approved till date is called Work Certified.

This is credited to the contract account.

Work Uncertified : The work which has not

been approved so far by the contractee’s

architect or the surveyor is termed as “ Work

Uncertified”.

Work Uncertified = Total Cost to date

less : Cost of Work Certified

Materials on hand

Plant at site

DETAILS FOR MAINTAINING A CONTRACT A/C

Dr. Particulars Rs. Cr. Particulars Rs.

All Opening Balances

All Expenses

All Profits

Notional Profit

a) To P/L A/ c ( Transfer)

b) To WIP A/c (Reserve)

All Closing Balances

All Abnormal Losses in plant and

Materials

Work in Progress

a) Work Certified

b) Work Uncertified

NOTIONAL PROFIT:

Notional Profit : Work certified

Plus : Work uncertified

Total Work Done

Less : Cost incurred till date

Notional Profit

PROFIT ON INCOMPLETE CONTRACTS :

Many contracts take more than one financial

year to be completed. For such incompleted

contracts we compute profit on partly

completed contracts and take credit for a part

of it in the accounts at the year end.

PRINCIPLES OF ACCOUNTING OF NOTIONAL PROFIT

If Loss is arrived on incomplete contracts ,

the entire loss is debited to Profit Loss

Account.

Profit should be considered only in respect

of work certified . The uncertified work

should be valued at cost.

If the amount of work certified is less than

25% of the contract price, then no profit

should be taken to Profit and Loss Account ,

and the entire amount is kept as reserve for

meeting contingencies .

CONTD …

If the amount of work certified is more than

25% of the contract price but less than 50%

of the contract price, then 1/3 rd of profit

ascertained as reduced by percentage of

cash received from the contractee should be

taken to Profit and Loss Account. i.e

Notional Profit * (1/3) * cash received

work certified

The balance will remain as reserve for

meeting contingencies.

CONTD..

If the amount of work certified is 50% or

more of the contract price, then 2/3 rds of

profit ascertained as reduced by percentage

of cash received from the contractee is to

taken to Profit and Loss Account, keeping the

remaining amount in reserve. The formula is

given below :

Notional Profit * (2/3) * cash received

work certified

CONTD…

If the contract is nearing completion (nearly

90% of work is completed already) , the total

cost of completing the contract may be

estimated if possible and then ascertain the

estimated total profit.

So, the amount of profit transferred to Profit

Loss Account is given by :

Estimated Profit * Cash Received * Work Certified

Work Certified Contract Price

ILLUSTRATION:

A firm of Building contractors began to trade on 1ST April,2002. The

following was the expenditure on the Rs.3,00,000 contract?

Cash received amounted to Rs1,28,000 being 80% of work certified. Of the

plant and materials, Rs 3000 worth of plant and Rs 2000 worth of

Materials were lost.On 31st March2003, Plant which cost Rs 2000 was

returned to stores, Cost of work uncertified is Rs1000.Materials costing

Rs2300 were in hand on site. Depreciation is charged @ 15%. Prepare the

contract account.

Particulars Given

Materials issued to contract 51,000

Plant used for contract 15000

Wages Incurred 81,000

Other Expenses Incurred 5000

SOLUTION :

Closing value of the plant = 15000 – plant lost-

plant returned – depreciation

= 15000 – 3000 – 2000 = 10000 – dep (@ 15%)

= 10000 – 1500 = Rs 8500

Particulars Rs Particulars Rs

To Materials

To Plant

To Wages

To other Expenses

To Notional Profit c/d

To PL A/c (Transfer)

To WIP ( reserves)

51000

15000

81000

5000

26500

178500

14133

12367

26,500

By Profit and Loss A/c

Loss on Plant 3000

Loss on Mat 2000

By Plant returned stores 2000

less depreciation 300

By plant at site

By Work in progress

W Certified 160,000

Work UC 1000

By Materials at site

By Notional Profit c/d

5000

1700

8500

161000

2300

178,500

26,500

26,500

CONTD…

Work certified as a percentage of contract

price

= (1,60,000 / 3,00,000 )*100 = 53.33%

Profits to be transferred to P/L account :

Notional Profits * (2/3) *( cash received )

work certified

= 26500 * (2/3)* (1,28,000/ 1,60,000)

= Rs. 14133.

NUMERICAL 2 :

Prepare a Contract Account from the following particulars

pertaining to building contracts which commenced on April

1st 2002:

The contract Price agreed upon was Rs.5,00,000.Cash

received on 31-3-2003 after deduction of 20% retention

money was Rs 2,20,000.The materials on site =Rs14,600.

The contract plant ledger showed a debit in respect of this

contract for Rs4540 up till date.

Materials purchased from stores

Materials Purchased

Labour

Direct Expenses

Establishment Expenses (allocated)

Plant used on other contracts

Additional Plant

23,750

1,09,620

1,14,786

3,690

20,166

16,460

10,500

CONTD..

CONTRACT ACCOUNT :

Particulars Rs. Particulars Rs.

To Materials from stores 23,750 By Materials on site 14,600

To Materials Purchased 1,09,620 By Work Certified

( 2,20,000 / 80%)

2,75,000

To Labour 1,14,786

To Direct Expenses 3690

To Depreciation on Plant 4540

To Establishment Expenses 20166

To Notional Profit c/d 13,048

2,89,600 2,89,600

To P/ L account (transfer) 6958 By Notional Profit b/d 13,048

To WIP A/c (Reserve) 6090

13,048 13,048

CONTD…

Work certified as a percentage of contract

price

= (2,75,000 / 5,00,000 )*100 = 55%

Profits to be transferred to P/L account :

Notional Profits * (2/3) *( cash received )

work certified

= 13048 * (2/3)* (2,20,000/ 2,75,000)

= Rs. 6958.

THANK YOU

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