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CONTRACT COSTING

Contract costing is that method of costing in cost accounting which is used to collect and identify all the expenses relating to a specific contract.

TYPES OF CONTRACT Fixed price contract Contract with Escalation clause Cost plus contract

VARIOUS COSTS AND THEIR TREATMENT


Materials O Material purchased directly for the contract or supplied from stores is debited to the contract account. O Material s returned to stores are credited to contract account and referenced with material return note. O In case materials already issued to contract get abnormally lost due to fire, theft etc., the cost of such materials is credited to contract A/C. O Material lying at site at the end of the period is credited to contract A/C. Direct Labour/Wages O All labour employed at the contract site should be debited to the concerned contract as direct labour. O Wages outstanding on account of a contract at the end of the period should be debited to that contract A/C.

Direct Expenses O All expenses other than material and labour, incurred for a contract, such as, insurance, salary etc. are debited to the contract as direct expenses. Plant and machinery O Contract account is debited with full value of plant and machinery when it is issued to or purchased for the contract and is credited by its depreciated value at the end of the period. O Contract is debited only with the depreciation depending upon the time period for which plant and machinery has been used for the contract.

WORK IN PROGRESS
A contract may be completed over a period of more than one year. At the end of an accounting period a major or minor portion of contract work might have been done but the contract might not have got completed. Entire work done before the stage of completion of contract is work-in-progress. The work-inprogress is subjected to scrutiny by an expert based on which it may be classified as work certified and work uncertified.

WORK CERTIFIED The part of the work which has been approved or certified and valued by the expert called work certified. Why work certified O It helps monitoring the progress of work done by the contractor. O It is the basis of payment by the contractee to the contractor. O Estimation of profit before completion of contract is based on work certified.

Work Uncertified It is that part of work-in-progress which has not been approved by the expert. Work Uncertified is to be costed for material and labour spent on such work. Such work valued at cost only.

PROFIT ON UNCOMPLETED CONTRACT


O If the value of work certified is less than th of the total contract, the entire notional profit should be kept aside as reserve and no credit for profit should be taken to profit & loss A/C. O In case there is notional profit and the value of work certified is th or more of total value of contract but less than of contract value: Profit transfer to P&L A/C= Notional profit. 1/3(Cash received/ work certified) O Value of work certified is equal to or more than of the contract but less than 90% Profit transfer to P&L A/C= Notional profit. 2/3(cash received/work certified) O Value of work certified is up to 90% or more Estimated profit(work certified/contract price)

Particular Dr.
Material issued Wages paid Wages accrued Direct expenses Direct expenses accrued

Amount
3,36,000 3,40,000 2,800 8,000 1,200

Particular
Work in progress: Work certified Work uncertified Material at site Plant on hand

Amount Cr.

7,50,000 14,000 4,000 48,000

Plant purchased
General overhead Notional profit c/d

60,000
32,000 36,000 8,16,000 8,16,000 Notional profit b/d 36,000

Profit credited p&l Reserve on WIP (36000-19,200)

19200 16,800

36,000

36,000

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