Presentation on

Contract Costing

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 Contract Costing

y Contract costing is used to find out the cost and profit of

each contract for a given period.

y Contract
C t t costing
ti applies
li where
h th
the work
k iis undertaken
d t k tto
customer’s special requirement which lasts for longer
duration

y Contract costing enables the contractor to ascertain and

control
t l th
the costt off each
h jjob
b or contract.
t t

y Ex :- construction of road
road, building
building, dams
dams, bridges
bridges, and
other civil engineering works
 Important Terms used in Contract costing

y Contractor – the person who undertakes the contract

y Contractee – the person for whom contract is undertaken

y Contract Price - is the amount agreed to be paid by the

contractee to the contractor as consideration for the job
done

y Work Certified – Contractor receives amount payment

against the value of work completed at specific interval.
Certificate is given by architect
y Retention Money –the amount retained by the
contractee so as to safeguard his interest incase of future
defects in work done

y Work Uncertified – The work is carried out but which is

not certified by architecture
 Features of Contract Costing

y Work is carried out at the contractee’s place.

y Certificate of work done has to be certified by architect or
engineer.
y Th
There may b be penalty
lt clause
l ffor llate
t completion
l ti and dbbonus
clause for early completion.
y Material
ate a coconsumed
su ed , labor,
abo , ove
overheadseads & dep
depreciation
ec at o aaree
debited to contract account.
y Contract may continue for more than one accounting
period.
i d
y Payroll is prepared at either the site or at central
administrative office.
 Recording of Contract Costs
# Cost kind Debit Side Credit Side
1
1. Materials • Required for a • Returned under the
specific contract. materials returned
(Contract a/c) note. (Contract a/c)

-Materials transfer from one • Contract • Contract giving the

contract to another. receiving the material.
material.

-Materials sold at site when not

required for current use. • Amount received.
(Difference b/w cost & sale value
transferred to P & L a/c.)

-Value of materials that remain • value of material

unutilized at the accounting unused or @ site
period.
# Cost kind Debit Side Credit Side
2. Wages • Accrued or
outstanding at the
end of period
(Contract a/c.)

3
3. Plant and Machinery
-Purchased for a particular contract • Total cost.
and exhausted at site.

-Sold at site on completion of the • Amount for

contract. which sold

-If
If not sold. • Value depreciated.

-If
If taken
t k on hi
hire. • Hire
Hi charges
h with
ith
no depreciation.
# Cost kind Debit Credit

4. Sub Contract
Sub-Contract • Direct charge to the
-Payments made. main contract with
-Materials issued. no break-up.

-Heavy
H tools
t l and dE
Equipments
i t • Depreciation
D i ti
supplied on a rental basis. charged.

5.
5 Expenses
p
Other than material and wages • Direct or indirect
charged to individual contracts.
 Profit on Incomplete Contracts

y Profit should be considered in respect of work certified only

CONTRACT PROFIT
COMPLETION CALCULATION

No profit should be
< 25 % computed and credited to
the profit and loss account
1/3 * Notional Profit *
> 25 % and < 50 % (Cash received/Work
Certified )
Notional Profit =Value of work certified - (cost of work to
date – cost of work not yet certified)
 CONTRACT PROFIT CALCULATION
COMPLETION
Between 50 % and 90 % 2/3 * Notional Profit * ( Cash
Received/Work Certified )

90 % or > 90 % Estimated
st ated Profit
o t * ( Wo
Work
Certified/Contract Price )

Estimated Profit * ( Cash

Received/Work Certified )

Notional Profit * (Work

C ifi d/C
Certified/Contract P
Price
i ) {If additional
ddi i l
expenditure is not mentioned}

y The total of loss ,if

if any , should be transferred to the
profit and loss account by crediting the contract account
 Cost Plus Contract / Escalation Price

y The practice of cost-plus contracts is adopted in the case of those

contracts where
h the
h probable
b bl cost off the
h contracts cannot b be
ascertained in advance with a reasonable accuracy.
y These contracts are preferred when the cost of material and labour
is not steady and the contract completion may take number of years.
y The different costs to be included in the execution of the contract
are mutuallyy agreed,
g , so that no dispute
p mayy arise in future in this
respect. Under such type of contracts, contractee is allowed to check
or scrutinize the concerned books, documents and accounts.
y Such a contract offers a fair price to the contractee and also a
reasonable profit to the contractor.
y The contract price here is ascertained by adding a fixed and
mutually pre
pre-decided
decided component of profit to the total cost of the
work.
 Case

y Bharat agency undertook a contract for Rs 500000 on 1st July

2008. On 31st March 2009 when contract account was closed for
the year following information is made available
Particulars Amount Particulars Amount
Material Issued 55000 Cost of subcontract 15000
Direct expenses 6000 Wages unpaid 2000
Si office
Site ffi cost 10000 M
Material
i l @ site
i 5000
Plant 200000 Work uncertified 20000
Direct exp. Prepaid 1000 Cash received (80 % of 200000
work
k certified)
f d
Wages paid 18000
General Overhead 25 % of total wages
y The p
plant was installed on 1st dayy of contract and to
be depreciated at 10% per annum
y Prepare a contract account and the balance sheet of
the contractor, related to his contract on 31st march
2009.
 Solution – Contractor A/C
Dr (Expenses) Amount Cr (Income) Amount
To material 55000 By Material @ site 5000
To Direct Expenses 5000 By work certified 250000
Less prepaid expenses

To site office cost 10000 Byy Work Uncertified 20000

To plant Depreciation @10 15000
%
Wages 20000
Add unpaid wages
To Subcontract 15000
To overhead @ 25% of wages 5000

To Notional Profit 150000

Total 270000 Total 270000
To P&L A/C 80000
To WIP (Res) 70000 By Notional Profit 150000
y % of work = ((cash received / work certified)) * 100
certified = (200000/ 250000 ) * 100
= 80 %
y Profit to be credited to P&L a/c
= ((2/3)
/3) * notional profit
p * (cash
( received / work
certified )
= (2/3) * 150000 * (200000/250000)
= 80000
 Balance sheet

Liabilities Amount Asset AdJ Amount

P & L A/C 8
80000 Plantt
Pl 200000 8
185000
- Depreciation - 15000
Outstanding 2000 Prepaid Expenses 1000
wages
Material @ site 5000
Work certified 250000 0
+ work uncertified + 20000
-Reserves -70000
- payment received - 200000

Note -Balance sheet will not match as it is only extract of information

 REFERENCES

y Lal,, Jawahar and Srivastava,, Seema ((2009)) Cost

Accounting, India: Tata McGraw- Hill
y Williamson, Duncan(1996) Contract Costing Worked
Examples [Online] Available
at:<http://www.duncanwil.co.uk/contract.html >
[A
[Accessed d 24th November,
N b 2010]
y Lakum, Ketan(2000) Contract- Costing [Online]
A il bl
Available
at:<http://www.scribd.com/doc/29496672/Contract-
Costing> [Accessed 24th November,
November 2010]
Thank You