WHAT IS 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."
Format:-
Particulars Rs. Particulars Rs.
To Materials
a. Purchased directly
b. Issue from site
c. Supplied by contractee
**
**
** By materials returned **
By Material sold (cost price)
**
To Wages and salaries ** By WIP
Work certified
Work Uncertified
**
**
To Other direct Expenses **
To Sub-contractor fees **
To Plant & Machinery (purchase
price/Book value)
** By Materials at site **
To Indirect expenditure (apportioned share of overheads) ** By Plant and machinery(WDV)
**
To Notional profit (Surplus) **
Total Total **
Profit of Incomplete contract :-
1) When % of completion is less than or equal to 25% then full Notional profit is
transferred to reserve.
2) When % of completion is above 25% but less than 50% following amount should
be credited to profit & loss a/c = 1/3 * Notional Profit * {Cash received / Work
certified}
3) When % of completion is more than or equal to 50% then the amount transferred
to profit is = 2/3 * Notional Profit * {Cash received / Work certified}
[Balance is transferred to reserve a/c]
☺ % of completion = {Work certified/Contract price} * 100
4) When the contract is almost complete the amount credited to profit & loss a/c is
a) Estimated total profit * {Work certified / Contract price}
b) Estimated total profit * {Cash received / Contract price}
c) Estimated total profit * {Cost of work done / Estimated total profit}
d) Estimated total profit*{Cost of work done*Cash received
Estimated total cost * Work certified}
5) Work-In-Progress is shown in Balance Sheet as follows:-
Skeleton Balance sheet
Liabilities (RS) Asset (Rs)
Profit & loss a/c (will include)
Profit on contract (Specify
the contract number)
Less : Loss on contract
(Specify the contract number)
Sundry creditors (will include)
Wages accrued
Direct expenses accrued
Any other expenses
(Specify) Work-in-progress
Value or work certified
Cost of work uncertified
Less :- Reserve for unrealized profit
Less :- Amount received from contractee
6) Escalation Clause = This is to safeguard against likely change in price of cost
elements rise by and certain % over the prices prevailing at the time tendering the
contractee has to bear the cost.
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