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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
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.
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.
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
19200 16,800
36,000
36,000