CONTRACT COSTING
Contract costing is “A form of specific order costing; attribution of costs to individual contracts”.
A contract cost is “Aggregated costs of a single contract; usually applies to major long term contracts rather than short term jobs”.
Features of long term contracts:
• By contract costing situations, we tend to mean long term and large contracts: such as civil engineering contracts for building houses, roads, bridges and so on. We could also include contracts for building ships, and for providing goods and services under a long term contractual agreement.
• With contract costing, every contract and each development will be accounted for separately; and does, in many respects, contain the features of a job costing situation.
• Work is frequently site based.
We might have problems with contract costing in the following areas
• Identifying direct costs
• Low levels of indirect costs
• Difficulties of cost control
• Profit and multi period projects
The source of the following has eluded me: my sincere gratitude for whoever the author might be.
"Contract Costing such jobs take a long time to complete & may spread over two or more of the contractor's accounting years”.
Features of a Contract
• The end product
• The period of the contract
• The specification
• The location of the work
• The price
• Completion by a stipulated date
• The performance of the product
Collection of Costs :
Desirable to open up one or more internal job accounts for the collection of costs. If the contract not obtained, preliminary costs be written off as abortive contract costs in P&L In some cases a series of job accounts for the contract will be necessary:
• to collect the cost of different aspects
• to identify different stages in the contract
Special features
• Materials delivered direct to site.
• Direct expenses
• Stores transactions.
• Use of plant on site
Two possible accounting methods:
Where a plant is purchased for a particular contract & has little further value to the business at the end of the contract
Where a plant is bought for or used on a contract, but on completion of the contract it has further useful life to the business
Alternatively the plant may be capitalised with Maintenance and running costs charged to the contract."
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