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 Closing Balances

All Expenses All Abnormal Losses in plant and

Materials
All Profits
Work in Progress
Notional Profit
a) Work Certified
a) To P/L A/ c ( Transfer) b) Work Uncertified
b) To WIP A/c (Reserve)
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?

Particulars Given
Materials issued to contract 51,000
Plant used for contract 15000
Wages Incurred 81,000
Other Expenses Incurred 5000

 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.
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 51000 By Profit and Loss A/c

To Plant 15000 Loss on Plant 3000
To Wages 81000 Loss on Mat 2000 5000
To other Expenses 5000 By Plant returned stores 2000
To Notional Profit c/d 26500 less depreciation 300 1700
By plant at site 8500

By Work in progress
W Certified 160,000
Work UC 1000 161000
By Materials at site 2300

178500 178,500

To PL A/c (Transfer) 14133

To WIP ( reserves) 12367 By Notional Profit c/d 26,500

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:
Materials purchased from stores 23,750
Materials Purchased 1,09,620
Labour 1,14,786
Direct Expenses 3,690
Establishment Expenses (allocated) 20,166
Plant used on other contracts 16,460
Additional Plant 10,500

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.
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 2,75,000
( 2,20,000 / 80%)
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.
 T
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