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CA2


UNIT 3


CONTRACT COSTING


Contract Costing is the form of specific order costing which applies where work is undertaken to customer’s special requirements and each order is of long duration. It is a special type of job costing where the unit of cost is a single contract. Contract itself is the cost centre and it is executed under the specifications of a customer. Contract Costing is mainly used by Civil Engineers who undertake long term projects such as construction of road, bridge, building etc. it is similar to job costing. It has following features.

 

  1. The work is done at a site which is generally away from the contractor’s premises.
  2. The contract takes more than a single accounting period.
  3. Most of the expenses are chargeable directly to the contracts.
  4. Each contract is distinct and dissimilar from other contracts.

 


 

The following terms are generally used in Contract Costing:

Contract: A contract is a legally enforceable agreement. It is an agreement between contractor and contractee which contains the terms and conditions in relation to a job.

 

Contractor: The person who undertakes to do the job is a contractor.

 

Contractee: The person for whom the job is being done is the contractee.

 

Contract Price: It is the amount agreed to be paid by the contractor as consideration for the job to be done.

 

Work certified: It is the quantum of work done by the contractor and certified by the technical assessor (surveyor or architect) appointed by the Contractee in terms of the contract.

 

Work uncertified: It is the value of work completed by the contractor but not certified by the Architect or Surveyor at the end of the accounting period.

 

Retention Money: It is the amount in respect of the portion of work certified and retained by the contract with firm as security deposit on account of any loss that may arise due to defects in the work noticed in future.

 


 

Under Contract Costing, a contract is basically the cost unit and it is regarded as a cost centre for the purpose of control. A separate contract account is opened for individual contract for the purpose of determination of profit or loss on each contract. The following costs are recorded in the contract account.

 

Materials:-

 

Materials are normally purchased and delivery obtained at the site. Excess materials, if any, may either be sold at site or returned to the store. Sometimes, materials are sent from one site to another. All the materials purchased or sent from the stores or another site are debited to contract account and materials sold or returned to stores are credited to the contract. Materials on hand at the end of the accounting period are credited to contract account.

 

Labour:

It is easy to allocate major part of the labour to contract account. A muster is maintained at the site for the contract. Labour cost is accumulated and debited to each contract.  Some workers are deputed from one site to another for some time which is debited to the respective contract on the basis of the time spent on each contract. At the end of the accounting period, the amount of outstanding labour charges is determined and also debited to the contract account.

 

Plant & Tools:

 

The contract account is debited to the extent of the depreciation of the plant or tools used for the period on each contract.

 

Sub-Contracting:

 

A part of the work may be given to another contract or which is called sub-contracting. The entire amount paid to the sub- contractor is debited to the particular contract account.

 

Work in Progress:

 

At the end of the accounting period an incomplete contract will appear as an asset in the balance sheet. The work in progress includes the following:

 

Cost of work Certified xxx

Cost of work uncertified xxx

Profit taken credit for xxx

Total

Less: Account received from  the Contractee xxx

Work in Progress xxx

 

The value of work in progress is the balance on the contract account which is carried down to the following accounting period.

 


The difference on the two sides of contract account naturally indicates the profit or loss on the contract and is transferred to costing profit and loss account. When the contract is incomplete at the end of the costing period, several adjustments are usually necessary to close the books.

 

It is the general rule that profit cannot be anticipated and taken credit for. Therefore, profit earned on a contract must be recognized only on the completion of the contract. However, large contracts are hardly completed in the year of commencement. They extend over a number of accounting periods. Therefore, it is advisable to take credit for profit where it is anticipated. In such a case it is always good that profit is conservatively calculated and only a percentage of total estimated profit on the complete contract equivalent is transferred to the general profit and loss account.

 

The following principles must be borne in mind in determined the amount of profit to be taken credit for:

 

      The stage of completion of the contract is determining as follows :

Work Certified = Contract Price x 100

 

It is conventional to classify incomplete contracts on the basis of the stage of completion as under:

 

      If the work completed is less than 25%, then no profit is taken credit for during that accounting period.

      If the work completed is 25% to 50%, one third of profit is taken credit for during that period.

      If the work completed is more than 50% but less than 75%, half of the profit is taken credit for during that period.

      If the work completed is more than 75 % but less than 90 % two third of the profit is taken credit for during  that period and

      If the work is almost completed and very insignificant portion is remained, estimated cost of expanses for the outstanding work is charged, to the cost and the entire profit is taken credit for during the period.

 

Even here, it is considered improper to take the entire estimated profit to the profit and loss account when cash for the work done is not received. The portion of profit for which credit can be taken is determined by using the following formula:

Cash received Profit = Estimated Profit              x              --------------------

Work Certified

 

Since the cash received from the contractee is normally less than work certified, this method is suitable for conservatism principles.

 


 

Q.1

National Co. Ltd. Undertook a contract at a price of Rs. 10,00,000. The work started 1st on April 2008. Prepare a Contract Account for the year ended 31st March 2009, from the following particulars.

 

Particulars

Amt

Materials issued to site

85,000

Labour on site

75,000

Plant installed at site

15,000

Sundry Direct Expenses

3,000

Establishment charges allotted to contract

4,000

Materials returned to stores

500

Work certified by architect

2,00,000

Cost of work not certified

5,000

Materials on hand on 31-3-2009

2,000

Wages due on 31-3-2009

10,000

Value of plant on 31-3-2009

12,000

Cash received

 

1,80,000

 

Solution:

Contract A/c

PARTICULAR

AMOUNT

AMOUNT

PARTICULAR

AMOUNT

AMOUNT

To Materials

 

85,000

By contractee A/c

 

 

To Wages

75,000

 

Work Certified

 

2,00,000

Add : O/S wages

10,000

85,000

 

 

 

To Depreciation on Plant

 

3,000

By Material Return to Stores

 

500

To Sundry Expenses

 

3,000

By WIP

 

 

To Establishment Charges

 

4,000

Work Uncertified

5,000

 

To bal c/d

 

32,000

Material in hand

2,000

7,000

 

 

 

 

 

 

 

 

2,12,000

 

 

2,12,000

 

Note:- 

Since the contract has been completed less than 25% no profit will be taken to Profit & Loss Account. Hence, the balance of contract account will be taken as  work  in progress.

 

Q.2

SM Construction Ltd. Have obtained a contract for construction of a bridge. The contract price is Rs.  12,00,000 and the work commenced on 1st November 2008. The following details are shown in their books for the year ended 30th September 2009.

 

Particulars

Amt

Materials issued to site

3,25,000

Wages paid

3,00,000

Plant purchased

50,000

General overheads apportioned

30,000

Direct Expenses

10,000

Wages accrued on 30-9-2009

3,000

Materials at site on 30-9-2009

4,000

Direct expenses accured as on 30-9-2009

1,000

Work not yet certified

14,000

Cash received being 80% of work certified

6,00,000

 

Life of the plant purchased is 5 years and the scrap value is nil. Prepare Contract account, and show the amount of profit which would be taken on contract on a conservative basis.

 

Solution:

Contract A/c

PARTICULAR

AMOUNT

AMOUNT

PARTICULAR

AMOUNT

AMOUNT

To Materials

 

3,25,000

By

 

 

To Wages

3,00,000

 

Cost of Work Certified

 

14,000

Add : Accured wages

3,000

 

By Contractee A/c

 

7,50,000

To Depreciation on Plant

 

10,000

By Material at site

 

4,000

To Direct Expenses

10,000

 

 

 

 

Add : accured

1,000

11,000

 

 

 

To General Overhead

 

30,000

 

 

 

To P&L

35,600

 

 

 

 

To Balance B/d

53,400

89,000

 

 

 

 

 

7,68,000

 

 

7,68,000

 

Note:

Profit to be taken to P & L Account is as follows:

Contract completed = 7,50,000 / 12,00,000 x 100

=62.5%

 

Since contract is complete more than 50% but less than 75% half of the estimated profit should be taken to Profit and Loss Account which will further be reduced to the proportion of cash received to work certified.

 

Cash received

Cash received

Profit = Estimated Profit x ½ x ---------------------

Work certified

1 x 6,00,000

= 89,000 x  ------------------ = 35,600

2 x 7,50,000

 

0

(iii)   Work certified    = 100 / 80 x 6,00,000

= 7,50,000

 

Q.3

 

Particulars

Amt

Material Purchased

6,00,000

Material drawn from stores

1,00,000

Wages

2,25,000

Plant issued

75,000

Chargeable expenses

75,000

Apportioned indirect expenses

25,000

 

The contract was for Rs.20,00,000 and it commenced on January 1, 2018. The value of the work completed and certified up to 30th November, 2018 was Rs.13,00,000 of which 10,40,000 was received in cash, the balance being held back as retention money by the contractee. The value of work completed subsequent to the architect’s certificate but before 31st December, 2018 was Rs. 60,000. There were also lying on the site materials of the value of Rs.40,000. It was estimated that the value of plant as at 31st December, 2018 was Rs.30,000.

 

You are required to COMPUTE value of work certified, cost of work not certified and notional profit on the contract till the year ended 31st December, 2018

 

Solution:

Contract A/c

PARTICULAR

AMOUNT

AMOUNT

PARTICULAR

AMOUNT

AMOUNT

To Material Purchased

 

6,00,000

By WIP

 

 

To Stores issued

 

1,00,000

Value of work certified

 

13,00,000

To Wages

 

2,25,000

Cost of work Uncertified

 

60,000

To plant

 

75,000

By Material unused

 

40,000

To chargeable expenses

 

75,000

By plant less depreciation

 

30,000

To indirect Expense

 

25,000

 

 

 

To costing P&L

(Notional profit) (bal. Figure)

 

3,30,000

 

 

 

 

 

14,30,000

 

 

14,30,000

 

Q.4

A contractor prepares his accounts for the year ending 31st  December each year.  He commenced a contract on 1st April, 2018.

The following information relates to the contract as on 31st December, 2018:

Particulars

Amt

Material issued

2,51,000

Wages

5,65,600

Salary to Foreman

81,300

A machine costing Rs 2,60,000 has been on the site for 146 days, its working life is estimated at 7 years and its final scrap value at Rs.15,000.

A supervisor, who is paid Rs 8,000 p.m. Has devoted one-half of his time to this contract.

All other expenses and administration charges amount to Rs.1,36,500. Material in hand at site costs Rs.35,400 on 31st December, 2018.

The contract price is Rs. 20,00,000. On 31st December, 2018 two-third of the contract was completed. The architect issued certificates covering 50% of the contract price, and the contractor had been paid Rs.7,50,000 on account.

PREPARE Contract A/c and show the notional profit or loss as on 31st December, 2018.

Solution:

Contract A/c

PARTICULAR

AMOUNT

AMOUNT

PARTICULAR

AMOUNT

AMOUNT

To Material issued

 

2,51,000

By Machine (WN1)

 

2,46,000

To Wages

 

5,65,600

By Material (in Hand)

 

35,400

To Foreman’s Salary

 

81,300

By Work Cost

(Balancing Figure)

 

10,49,000

To Machine

 

2,60,000

 

 

 

To Supervisor’s Salary (8,000 × 9)/2

 

36,000

 

 

 

To Administrative charges

 

1,36,500

 

 

 

 

 

13,30,400

 

 

13,30,400

To Works cost

 

10,49,000

By Value of work certified

 

10,00,000

To Costing P&L A/c (Notional profit)

 

2,13,250

By Cost of work uncertified (Working Note 2)

 

2,62,250

 

 

12,62,250

 

 

12,62,250

Working notes:

 

  1. Written down value of Machine:

2,60,000 – 15,000 / 7 years x 146 days / 365 days = 14,000

Hence the value of machine after the period of 146 days = 2,60,000 –14,000 = 2,46,000

 

2.      The cost of 2/3rd of the contract is 10,49,000

Cost Of 100% of Contract is 10,49,000 / 2 x 3 = 15,73,000

Cost of 50% of the contract which has been certified by the architect is Rs.7,86,750. Also the cost of 1/3rd of the contract, which has been completed but not certified by the architect is Rs. 2,62,250.

Q.5

Amit Construction Ltd. Commenced a contract on April 1, 2018. The total contract was for Rs 49,21,875. It was decided to estimate the total profit on the contract and to take to the credit of Costing Profit and Loss A/c that proportion of estimated profit on cash basis, which work completed bore to total contract. Actual expenditure for the period April 1, 2018 to March 31 2019 and estimated expenditure for April 1, 2019 to September 30, 2019 are given below:

 

 

April 1, 2018 to March 31, 2019

(Actual)(Rs)

April 1, 2019 to Sept. 30, 2019

(Estimated) (Rs)

Materials issued

7,76,250

12,99,375

Wages: Paid

5,17,500

6,18,750

Prepaid

37,500

-

Outstanding

12,500

5,750

Plant purchased

4,00,000

-

Expenses: Paid

2,25,000

3,75,000

Outstanding

25,000

10,000

Prepaid

15,000

-

Plant returns to store (historical cost)

1,00,000

(on September 30,

3,00,000

(on September 30,

 

2018)

2019)

 

 

 

Work certified

22,50,000

Full

Work uncertified

25,000

-

Cash received

18,75,000

-

Materials at site

82,500

42,500

 

The plant is subject to annual depreciation @ 25% on written down value method. The contract is likely to be completed on September 30, 2019.

Required: PREPARE the Contract A/c for the year ended 31st March, 2019  and determine the estimated profit on the contract.

Solution:

Contract A/c (1.4.18 to 31.3.19)

Particulars

(Rs)

Particulars

(Rs)

To

Materials issued

7,76,250

By

Plant returned to Store on 30-9-2018

1,00,000

 

To

Wages

5,17,500

 

Less: Depreciation (1/2)

(12,500)

87,500

Less: Prepaid

(37,500)

 

 

 

Add: Outstanding

12,500

 

4,92,500

By

Plant at site on 31.3.19

 

 

 

 

 

3,00,000

To

Plant purchased

4,00,000

Less: Depreciation

(75,000)

2,25,000

To

Expenses

2,25,000

 

By

Materials at site c/d

 

82,500

Less: Prepaid

(15,000)

 

By

Work-in-progress c/d

 

Add: Outstanding

25,000

2,35,000

Work certified

22,50,000

 

 

Work uncertified

25,000

To

Notional profit

 

7,66,250

 

-

 

26,70,000

 

26,70,000

Contract A/c (1.4.18 to 31.9.19)

Particulars

(Rs)

Particulars

(Rs)

To Materials issued

(7,76,250 +12,99,375)

20,75,625

By

Plant returned to Store on 30-9-2018(100000-12500)

87,500

To Plant Purchased

4,00,000

By

Plant returned to Store on 30-9-2019(400000-100000-103125)

1,96,875

To Wages

(517500+12500+618750+

37500-12500+5750-37500)

11,42,000

By Contractee A/c

49,21,875

To Expenses

(225000+25000+15000+375000-25000+15000+10000)

6,10,000

By Materials at Site

42,500

To Estimated Profit

10,21,125

 

 

 

52,48,750

 

52,48,750

 

Working:

Calculation of WDV of Plant as on 30.9.2019

 

Plant purchased on 1-4-2018

4,00,000

Less: Plant returned to store on 30-9-2018

1,00,000

(Depreciation on it Rs1,00,000 x 25/100 x 6/12 = Rs12,500)

 

 

3,00,000

Less: Depreciation on Balance plant (3,00,000 x 25/100)

   75,000

WDV of Plant on 1-4-2019

2,25,000

Less: Depreciation (2,25,000 x 25/100 x 6/12)

   28,125

WDV of plant returned to store on 30-9-2019

1,96,875

 


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