CHAPTER 22

Contract Costing

Meaning
Contract Costing is a special type of job c.osting where the unit of cost is a single contract. Contract
itself is a cost centre and is executed under the customer's specifications. Contract Costing is defined by
the I C M A Terminology as "that form of specific order costing which applies where work is undertaken
to customer's special requirements and each order is of long duration. The work is usually of constructional
nature."
Contract Costing is also termed as ''Terminal Costing." The principles of job costing are applicable to
contract costing and is used by such concerns of builders, public works contractors, constructional and
mechanical engineering firms and ship builders etc. who undertake work on a contract basis.

SPECIAL FEATURES OF CONTRACT COSTING

The following are the special features of Contract Costing:
(1) The cost unit is a specific contract.
(2) Each contract takes a long time to complete.
(3) The work being of a constructional nature, the same is executed at customer's site, as per his
specifications.
(4) Bulk of the materials purchased and delivered direct to the contract site or obtained from the
central stores through the requisition slips.
(5) Generally specific portions of the contract are given to sub-contractors.
(6) Most of costs which are normally treated as indirect can be identified specifically with a
particular contract and are charged to it as direct costs.
(7) Overheads constitute only a very small proportion of the cost of the contract. However, indirect
costs consist mainly of administrative cost of the central office.
492 A Textbook of Financial Cost and Management Accounting

(8) Scale of operations and cost control becomes difficult due to theft of materials, labour time
utilization, pilferages etc.
(9) The pay roll is prepared either at the site or at a central administrative office.
Recording Cost o~ Contract or Costing Procedure
In contract costing, costs are allocated, collected and accumulated according to the contract works.
Each contract is treated as a separate entity in which each contract account may be maintained separately
or in general ledger itself for the purpose of costing and cost control. The following are the costing
procedure for different costs relating to the important expenses :
(1) Materials:
(A) Contract Account is debited with the following transactions relating to materials :
(I) Bulk of materials are purchased for a specific contract from suppliers.
(2) Materials obtained from contractor's central stores through the requisition slips.
(3) Materials transferred from one contract to another contract.
(4) Value of materials remaining unutilized on site during the accounting year.
(B) Contract Account is credited with the following transactions relating to materials:
(1) Materials returned under Materials Return Note.
(2) Sale of materials at site on account of some extraneous reasons.
(3) Materials transferred to other contracts.
(4) Materials stolen or destroyed by fire.
(5) On completion, if a part of materials received from the stores are returned.
(C) Any profit or loss on materials account is transferred to the Profu and Loss Account:
(I) Sale price is different from the cost price.
(2) Resulting from the sale of materials at site.
(3) Resulting from the materials stolen or destroyed by fire.
(2) Labour: In the case of contract costing, all labours engaged at site and the salaries and wages paid
to the labour and workers are treated as direct labour cost is debited to Contract Account.
(3) Direct Expenses: Most of the expenses like electricity, insurance telephone, postage, sub-contracts,
Architect's fees etc. can also be treated as direct cost is debited to Contract Account.
(4) Overhead Cost: In the case of contract costing overheads incurred only an insignificant part of the
total cost of contract account. The nature office and administrative expenses of a particular contract may be
apportioned on suitable basis.
(5) Plant and Machinery: For use of plant and machinery in a particular contract, the treatment of
plant costs in any of the two ways:
(a) Where a plant has been specially purchased for a particular contract and will be exhausted
at site Contract Account should be debited with the cost of the plant. On completion of the
contract the residual or written down value as shown by the Plant Ledger will be credited "to
the Contract Account.
Contract Costing 493

(b) When the plant and machinery are required to the contract site only for a shorter period, the
contract account should be debited with the notional amount of depreciation based on some
estimates be charged to Contract Account.
(6) Sub-Contracts: Sub-Contracts refer to some portions of the specified work connected with the
main contract, to be done by the sub-contractor. For example, the work of painting, special flooring, steel
work etc. may be given to the sub-contractors. Usually sub-contract has been undertaken on cost-plus basis
and the cost of such sub-contract should be treated as a direct charge and is debited to Contract Account.
(7) Work Certified: In the case of the small contracts which are completed within the shorter period,
the contractor pays the contract price on the completion of the contract. In the case of contracts of long duration.
the contract agreement provides interim payment to the contractor. It is done on the basis of certificates issued
by the contractee's Surveyor, Architect or Engineer. At the same time Contractee usually does not pay to the
full value of the work certified. A portion of amount say 20% or 30% thereof shall be retained by the Contractee.
The money so retained is called as "Retention Money." This retention money is intented to ensure that the
contractor to complete the work as scheduled and according to specifications. Money retained could also be
used for imposing penalties for faulty or delayed work. This amount will be settled on completion of the
contract.
(8) Work Uncertified : If the progress of a work is unsatisfactory or the work has not reached the
stipulated stage, though certain work is completed, such work does not qualify for a certificate by the
Contractee's Architect or Surveyor is termed as "Work Uncertified." It is valued at cost and credited to Contract
Account and debited to Work in Progress Account.
(9) Work in Progress: Work in progress includes the amount of work .certified and the amount of work
uncertified. The work in progress account will appear on the asset side of the balance sheet. The amount of
cash received from the contractee and reserve for contingencies will be deducted out of this amount.
Treatment of Profits or Loss on Contracts Alc.
The accounting treatment of profits or loss of contracts in the following stages :
(A) Profit or Loss on incomplete contracts
(B) Profits or Loss on completed contracts
(A) Profit or Loss on Incomplete Contracts
To determine the profits to be taken to Profit and Loss Account. in the case of incomplete contracts,
the following situations may arise :
(i) Completion of Contract is Less than 25% : In this case no profit should be taken to Profit and
Loss Account.
(ii) Completion of Contract is upto 25% or more but Less than 50% : In this case one-third of
the notional profit, reduced in the ratio of cash received to work certified, should be transferred to Profit
and Loss Account. It can be expressed as :

1 Cash Received
- - x Notional Profit x - - - - - -
3 Work Certified

(iii) Completion of Contract is upto 50% or more but Less than 90% : In this case two-third of
the notional profit reduced by proportion of cash received to work certified is transferred to Profit and Loss
Account. The equation is
494 A Textbook of Financial Cost and Management Accounting

2 Cash Received
x Notional Profit x
3 Work Certified

(iv) Completion of Contract is upto 90% or more than 90%, i.e., it is nearing completion: In
this case the profit to be taken to Profit and Loss Account is determined by determining the estimated
profit and using anyone of the following formula :

Work Certified
(a) Estimated Profit x
Contract Price
Work Certified Cash Received
(b) Estimated Profit x x
Contract Price Work Certified
(or)
Cash Received
Estimated Profit x
Contract Price
Cost of Work to Date
(c) Estimated Profit x
Estimated Total Cost
Cost of Work to Date Cash Received
(d) Estimated Profit = x
Estimated Total Cost Work Certified
Work Certified
(e) Normal Profit =
Contract Price

Escalation Clause: This clause is often provided in contracts as safeguard against any likely changes
in price or utilization of material and labour. Such a clause in a contract would provide that in the event of a
specified contingency happening, the contract price would be suitably enhanced by an agreed formula or factor.
This clause is particularly necessary where the prices of a certain raw material are likely to rise. where labour
rates are anticipated to increase, or where the quantity of material and labour hours cannot be assessed properly
or estimated unless the job has progressed sufficiently.
Cost-Plus Contract: These contracts provide for the payment by the contractee of the actual cost of
manufacturing plus a stipulated profit. The profit to be added to the cost may be a fixed amount or it may be
a stipulated percentage of cost. These contracts are generally entered into when at the time of undertaking of
a work, it is not possible to estimate it's cost with reasonable accuracy due to unstable condition of material.
labour etc. or when the work is spread over a long period of time and prices of materials. rates of labour etc.
are liable to fluctuate.
(B) Profits or Loss on Completed Contracts
When a contract is completed, the overall profit or loss on the contract is transferred to the Profit and
Loss Account.
Contract Costing 495

Illustration: 1
The following are the expenses on a contract which commences on 1st Jan. 2003
Materials purchased 1.00.000
Materials on hand 5.000
Direct wages 1.50.000
Plant issued 50.000
Direct expenses 80.000
The contract price was Rs. 15.00.000 and the same was duly received when the contract was completed in
August 2003. Charge indirect expenses at 15% on wages. provide Rs. 10.000 for depreciation on plant and prepare the
contract account and the contractee's account.
Solution:
Contract Account
Particulars Amount Particulars Amount
Rs. Rs.
To Materials Purchased 1.00.000 By Materials on hand 5.000
To Direct Wages 1.50.000 By Plant on hand
To Direct Expenses 80.000 (Rs.50.000 - 10.(00) 40.000
To Indirect Expenses } By Contractor's Alc
(15% on wages) 22.500 (Contract Price) 15.00.000
To Depreciation on Plant 10.000
To Profit & Loss Alc 11.82.500
15,45.000 15,45.000

Contractee's Account
Particulars Amount Particulars Amount
Rs. Rs.
To Contract Alc 15.00.000 By Bank 15.00.000
15.00.000 15.00.000

Illustration: 2
How much profit. if any, you would allow to be considered in the following case?
Contract cost Rs. 2.80.000
Contract value Rs. 5.00.000
Cash received Rs. 2.70.000
Uncertified work Rs. 30,000
Deduction from bills by way of security deposit is 10%.

{MBA: Madras, 2001 J

Solution:
Cash Received = 100 - 10% =90% of work certified
100
Work Certified = Cash Received x
90
496 A Textbook of Financial Cost and Management Accounting

100
= 2,70,000 x - - =Rs. 3,00,000
90
Value of work certified = Rs.3,OO,OOO
Notional Profit = Work in progress - Contract cost
= (3,00,000 + 30,000) - 2,80,000
= Rs.50,OOO
Calculation of % of Work Certified

3,00,000
= x 100 =60%
5,00,000

60% of work certified is more than 50% of the contract value .

. '. Profit to be considered for crediting to P & L Alc

2 Cash Received
= Notional Profit x-- x
3 Work Certified

2 90
= 50,000 x -- x -- = Rs. 30,000
3 100

Alternatively

2 Cash Received
Profit to be taken = Notional Profit x- x-------
3 Work Certified
2 2,70,000
= Rs.50,000 x- x
3 3,00,000
= Rs.30,OOO
Illustration: 3
The following is the ledger balance of Himalayan Construction Company engaged on the execution
of ABC Apartments for the year ending 31st March 2003.
Direct Wages 1,25,000
Bank Balances 66,500
Rates and Taxes 7,500
Direct Expenses incurred 2,500
General overhead allocated 6,000
Fuel and power expenses 62,500
Materials issued to contract 7,00,000
Furniture 30,000
Plant and Machinery (60% at site) 12,50,000
Land and Building 11,50,000
The ABC Apartments was commenced on 1 st April 2002. Himalayan paid up capital of
Rs. 25,00,000. The contract price was Rs. 30,00,000. Cash received on account of contract up to 31 st March 2003 was
Rs. 9,00,000 (being 90% of the work certified). Work completed but not ctlrtified was estimated at Rs. 50,000. As on
31st March 2003 materials at site was estimated at Rs. 15,000. Machinery at site costing Rs. 1,00,000 was returned to
stores and wages outstanding were Rs. 2.500. Plant and machinery at site is to be depreciated at 5%.
Prepare the Contract Account and Balance sheet.
Contract Costing 497
Solution:
Himalayan Construction Ltd.
Contract Account
(for the year ended 31st March 2003)
Paniculars Amount Particulars Amount
Rs. Rs.
To Materials 7,00,000 By Materials at site 15,000
To Direct wages 1,25,000 By Machine returned }
To Wages outstanding 2,500 (Rs.I,OO,OOO - 5 % of 95,000
To Plant & Machinery } 1,00,000)
as site (60%) 7,50,000 By PI,", ,tKI M",hi""'l' }
To Fuel and Power 62,500 at site (Rs. 6,50,000 - 5% 6,17,500
To Direct expenses 2,500 of Rs. 6,50,000)
To General overhead 6.000 By Work in Progress:
To Rates & Taxes 7.500 100
To Notional profit cld 1.21.500 Rs. 9,00.000 x --
90
= IO,OO.OOO
Uncertified 50,000 10,50.000
17,77,500 17.77.500
To Profit and Loss Nc By National Profit bid 1.21.500

[1,21,500 x _1_ x ~] 36,450

3 100
To Work in Progress (Reserve) 85,050
1,21.500 1,21,500

Balance Sheet
Liabilities Amount Assets Amount
Rs. Rs.
Share Capital 25,00,000 Land and Building 11.50.000
Profit and Loss Nc 36,450 Plant and Machinery at site 6,17.500
Wages Outstanding 2,500 Plant and Machinery (store) 5.95,000
Furniture 30.000
Bank Balances 66,500
Work in Progress:
Work Certified 10.00.000
Work Uncertified 50,000
10.50.000
Less: Cash Received 9.00.000
1,50.000
Less : Reserve 85,050 64,950
Materials at site 15,000
25,38,950 25,38.950
498 A Textbook of Financial Cost and Management Accounting

Illustration: 4
MIs. Sidhu Associates commenced the work on a particular contract on 1st April 2003. They close
their books of accounts for the year on 31st December of each year. The following information is
available from their costing records on 31st Dec. 2003 ..
Rs.
Materials sent to site 43,000
Foremen's Salary 12,620
Wages paid 1,00,220
A machine costing Rs. 30,000 remained in use on site for 1/5th of year. Its working life was estimated at 5 years
and scrap value at Rs. 2,000.
A supervisor is paid Rs. 2,000 per month and had devoted one-half of his time on the contract.
All other expenses were Rs. 14,000. The materials on site were Rs. 2,500. The contract price was Rs. 4,00,000.
On 31st December 2003, 2/3rd of the contract was completed; however, the Architect gave certificate only for
Rs. 2,00,000, on which 80% was paid. Prepare Contract Account.
Solution:
Contract Account
Paniculars Amount Particulars Amount
Rs. Rs.
To Materials 43,000.00 By Plant 28,880.00
To Direct 1,00,220.00 By Material in hand 2,500.00
To Foremen's Salary 12,620.00 By Work in progress 2,13.143.20
To Plant 30,000.00 (Balance figure)
To Supervisor 9,000.00
To Other Expenses 14,000.00
To Profit & Loss Nc 35,683.20
2,44,523.20 2,44,523.20
Working Notes :
(1) Plant Ale Rs.
Plant 30,000
Less : Scrap Value 2,000
28,000

28,000
Depreciation = x - - = Rs. 1,120
5 5
Net Plant Value = 30,000 - 1,120 = Rs. 28,800
(2) CalCulation of Profit : Rs.
Expenditure till 31. 12.2003 2,08,840
Less : Materials and Plant 31,380
1,77,460
Less : Cost of uncertified work 44,365
1,33,095
Less : Work Certified 2,00,000
Profit up to date 66,905
Contract Costing 499
Profit on 80%

66,905 2 80
= x -- x = Rs. 35,683.20
3 100

Cost of Uncertified Work: As the 213rd of the work was completed for a cost of Rs. 1,77,460
therefore the estimate for the total cost would be Rs. 2,66,190. Architect's certificate represents ~ of the
contract price and therefore cover expenditure of ~ of Rs. 2,66,190, i.e., Rs. 1,33,095. Hence, the cost of
work uncertified Rs. 1,77,460 - Rs. 1,33,095 = Rs. 44,365.
Illustration: 5
William Construction Company Ltd. obtained a contract for the erection of a multi-story building.
Building operations started in July 2002. The contract price was Rs. 9,00,000. On 30th June 2003, the end
of the financial year, the cash received on account was Rs. 3,60,000 being 80% of the amount on the
surveyor's certificate.
The following additional information is given below:
Rs.
Materials issued to contract 1,80,000
Materials on hand 30. 6. 2003 7,500
Wages 2,46,600
Plant purchased specially for contract
and to be depreciated at 10% per annum } 30,000
Direct expenses incurred 12,900
General overhead allocated to contract 7,600
Work finished but not yet certified: cost 15,000
You are required to prepare the contract account and statement showing the profit on the contract to 30th June
2003, indicating what proportion of the profit the company would be justified in taking to the credit of the profit and
loss account, and to show what entries in respect of the contact would appear in the balance sheet.
Solution:
William Construction Co Ltd.,
Contract Alc for the year ended 30th June 2003
Paniculars Amount Paniculars Amount
Rs. Rs.
To Materials 1,80,000 By Plant at site 27,000
To Plant 30,000 By Material in hand 7,500
To Wages 2,46,600 By Cost of Contract c/d 4,42,600
To Direct Wages 12,900
To Overheads 7,600
4,77,100 4,77.100
To Cost of Contract bId 4,42,600 By Work in Progress:
To Profit & Loss Nc 11,946 Work Certified 4,50,000
To Work in Progress 10,454 Work Uncertified 15,000
(Reserve)
4,65,000 4,65,000
500 A Textbook of Financial Cost and Management Accounting
Statement showing computation of Profit taken to Profit and Loss Ale :
Profit made to date } Rs. 22,400
Profit taken to P & L Alc

[
22,400X 23 x ~J
100
Since half the contact is complete
213rd profit as reduced on cash basis Rs. 11,946
may safely be taken to P & L Alc
Profit taken back to WIP being } Rs. 10,454
Reserved carried forward
Extract from the Balance Sheet as on 31st June 2003 :
Assets Rs. Rs.
Plant at site: cost 30,000
Less " Depreciation provided 3,000 27,000
Current Assets :
Work in progress: Work Certified 4,50,000
Work Uncertified 15,000
4,65,000
Less,' Balance of profit not taken to P & L Alc 10,454
4,54,546
Less,' Cash received from contractee's 3,60,000
93,546
Add " Materials at site 7,500 1,02,046

Illustration: 6
Paramount Engineers are engaged in construction and erection of a bridge under a long-term
contract. The cost incurred up to 31. 03. 2003 was as under:
Fabrication Rs. in lakhs
Direct Materials 280
Direct Labour 100
Overheads 60
440
Erection cost to date llO
550
The contract price is Rs. 11 crores and the cash received on account till 31.03.2003 was Rs. 6 crores.
A technical estimate of the contract indicates the following degree of completion of work :
Fabrication - Direct Materials - 70%, Direct labour and overheads 60%; Erection - 40%.
You are required to estimate the profit that could be taken to profit and loss account against this partly completed
contract as at 31.03.2003.
Contract Costing 501
Solution: .
Estimated Cost and Profit o~ Completion of the Contract
Particulars Cost incurred up to Completion Estimated cost on
31.3.03 Rs. in lakhs % completion of 100%
Rs. lakhs
Direct Materials 280.00 70% 400.00
Direct Labour 100.00 60% 166.67
Overheads 60.00 60% 100.00
Erection 110.00 40% 275.00
Total 550.00 941.67
Contract Price 1,100.00
Profit on completion (1,100 - 941.67) 158.33

Profit on cost of Rs.9.41.67 lakhs is Rs.158.33 lakhs. Therefore, profit on cost to date of Rs.550 lakhs.

550 x 158.33
= 941.67
= Rs. 92.48 lakhs

Work Certified = Cost + Profit

= Rs. 550 + Rs. 92.48 =Rs. 642.48 lakhs
Degree of completion of contract is :
642.48 x 100
= 1,100
= 58.41 %

The contract is more than· half complete.

Profit to be taken to Profit and L~ss Account of the year is :
2 Cash Received
x Notional Profit x
3 Work Certified
2 x 92.48 x 600
= =Rs. 57.58 lakhs.
3 x 642.48

Illustration: 7
The following information relates, to a building contract for Rs. 1,00,00,000
2002 2003
Rs. Rs.
Materials issued 30,00,000 8,40,000
Direct Wages 2,20,000 10,50,000
Indirect Expenses 60,000 14,000
Work Certified 75,00,000 1,00,00,000
Work Uncertified 80,000
Materials at site 50,000 70,000
Plant issued 1,40,000 20,000
Cash received from contractor 60,00,000 10,00,0000
The value of plant at the end of 2002 and 2003 was Rs. 70,000 and Rs. 50,000 respectively.
502 A Textbook of Financial Cost and Management Accounting

Solution:
Contract Account for 2002
Particulars Amount Particulars Amount
Rs. Rs.
To materials issued 30,00,000 By Materials at site 50,000
To Direct wages 23,00,000 By Plant at site 70,000
To Direct Expenses 2,20,000 By work in progress:
To Indirect Expenses 60,000 Work certified 75,00,000
Work uncertified 80,000
75,80,000
To Plant Issued 1,40,000
To profit cld 19,80,000
77,00,000 77,00,000
To profit & Loss Alc 10,56,000 By profit bid 19,80,000
To work in progress 9,24,000
19,80,000 19,80,000
Profit taken to profit & Loss Alc :
Cash Received
=Total profit x 2/3 x
Work Certified
50,00,000
=Rs. 19,80,000 x 2/3 x = Rs. 10,56,000
75,00,000

Contractee's Account
Particulars Amount Particulars Amount
Rs. Rs.
2002 To Balance cld 60,00,000 2002 By cash 60,00,000
60,00,000 60,00,000

2003 To Contract Alc 1,00,00,000 2003 By Balance bid 60,00,000

By cash 40,00,000
1,00,00,000 1,00,00,000

Contract Account for 2003

Particulars Amount Particulars Amount
Rs. Rs.
To materials at site bid 50,000 By Material at site 70,000
To Plant at site bid 70,000 By Plant at site 50,000
To work in progress:
(75,80,000-9,24,000) 66,56,000 By Contract Ale 1,00,00,000
To Materials issued 8,40,000
To Direct wages 10,50,000
To Direct Expenses 1,00,000
To Indirect Expenses 14,000
To Plant Issued 20,000
To Profit & Loss Alc 13,20,000
1,01,20,000 1,01,20,000
Contract Costing 503
Illustration: 8
The following figures were in respect of contract No: 999 ofL & T Construction Ltd. for the year 2003:
Rs.
Materials purchased and delivered to work site 4,50,000
Materials issued from site stores 45,000
Materials retumed to stores 5,000
Site wages 1,50,000
Site office expenses 20,000
Plant transferred to site 50,000
Plant retumed from site 15,000
Consulting and design fees 13,000
Sub contract work 52,000
Central Office Overhead @ 10% Site Wages
The year end figures were in respect of Contract No. 999 of L & T Construction Ltd.
Rs.
Plant at site 18,000
Material at site 10,000
Prepayments 2,000
Accruals 3,000
Cost of work done but not certified 35,000
Value of work certified by Architect 8,63,000
On account payment received by L & T Construction Ltd. less 10% retention money; prepare: (a) Contract
Account (b) Profit and Loss on Contract Account and (c) Customer's Account.

I. Contract Account
Particulars Amount Particulars Amount
Rs. Rs.
To Materials purchased 4,50,000 By Materials at site 10,000
and delivered to work at site
To Materials issued 45,000 By Materials returned to stores 5,000
To Site wages 1,50,000 By cost of contract c/d 7,48,000
To Site office expenses
Rs.20,OOO
Add : Accruals : 3,000
23,000

Less: Prepayments 2,000 21,000

To Plant Rs.50,OOO
Less : Returned 15,000
35,000
Less : Plant at site 18,000
Depreciation on plant 17,000
To Consulting & Design fees 13,000
To Sub-contract work 52,000
To Central office overhead }
10% of site wages 15,000
7,63,000 7,63,000
504 A Textbook of Financial Cost and Management Accounting
II. Profit and Loss on Contract Account
Particulars Amount Particulars Amount
Rs. Rs.
To Cost of Contract bId 7,48,000 By contractee Alc 8,63,000
Value of work certified
To P& L Alc Profit taken 90,000 By cost of work not certified 35,000
To Profit in Reserve 60,000
8,98,000 8,98,000

Note: In the absence of total contract value, it has been presumed that the work has been reasonably advanced.
Hence the following formula is to be applied in order to arrive at the profit to be taken to
P & L Ale:

Cash Received
2/3 x National Profit x
Work Certified .

Notional Profit
Rs.
Value of work certified 8,63,000
Cost of contract Rs. 7,48,000
Less : Cost of work
not certified Rs. 35,000 7,13,000
Notional Profit 1,50,000

Cash Received = Rs. 8,63,000 - 10% retention money

=Rs. 8,63,000 - 86,300 =Rs. 7,76,700
2 7,76,700
Profit to be taken to P & L Ale = - x 1,50,000 x
3 8,63,000

=Rs. 90,000
III. Contractee Accountant
Particulars Amount Particulars ·Amount
Rs. Rs.
To contract Nc 8,63,000 By Cash Nc 7,76,700
By Balance cld 86,300
8,63,000 8,63,000
,
To Balance bId 86,300

QUESTIONS
1. What do you understand by Contract Costing?
2. Explain the essential features of Contract Costing?
3. Explain the important costing procedure of Contract Costing?
4. Write short notes on:
(a) Sub-Contracts
Contract Costing 505
(b) Work Certified
(c) Cost-Plus Contract
(d) Escalation Clause
(e) Work Uncertified
5. Explain and determine the profit to be taken to profit and loss account in case of incomplete contract
Choose the correct answer:
I. Contract costing is a basic method of
(a) Historical costing (b) Specific order costing
(c) Process costing (d) Standard costing
2. Contract costing usually applicable in
(a) Constructional Works (b) Textile Mills
(c) Cement Industries (d) Chemical Industries
3. In contract costing, determination of work in progress include:
(a) Work Certified (b) Work Uncertified
(c) Retention Money (d) Both a and b
4. Work Certified is valued at
(a) Cost price (b) Market price
(c) Cost or market price whichever is less (d) Estimate price
5. The degree of completion of work is determined by comparing the work certified with
(a) Contract price (b) Work in progress
(c) Cash received on contract (d) Retention money
6. In contract costing credit is taken only for a part of the profit on
(a) Completed contract (b) In complete contract
(c) Cost-plus contract (d) Work Certified
7. Escalation Clause in a contract to prefect the interest of
(a) Contractor (b) Contractee
(c) Surveyor (d) Contractee's Architect
8. In contract costing payment of cash to the contractor is made on the basis of
(a) Uncertified work (b) Certified work
(c) Work in progress (d) Estimated value
9. Materials returned under material return note credited to
(a) Contract account (b) Work in progress account
(c) Plant and machinery account (d) Profit and loss Nc
10. Cash received on contract is credited to
(a) Contract Account (b) Plant Account
(c) Work in Progress Account (d) Contractee's Account
[Ans: (1) b - Specific order costing (2) a - Constructional works (3) d - Both a and b (4) a - Cost price
(5) a - Contract price (6) b- Incomplete Contract (7) b - Contractee Account (8) b - Certified Work (9) a - Contract
Account (10) d - Contractee's account)
PRACTICAL PROBLEMS
(1) Kishore undertook a contract for the construction of houses on 1st Jan. 2003. The contract price was Rs. 22,50,000. The
following details are available for 2003
Materials purchased 3,60,000
Materials issued from stores 45,000
Labour 1,35,000
Plant installed at site 1,80,000
Direct expenses 90,000
Establishment charges 22,500
Materials returned to stores 22,500
Materials on hand at the end 9,000
Plant in hand at the end 1,35,000
Wages outstanding 27,000
Direct expenses outstanding 36,000
Work uncertified 2,25,000
Cash received (80% of work certified) 9,00,000
Prepare the Contract Account Show the relevant items in the balance sheet.
[Ans: Profit taken Rs. 3,31,200 ; WIP Rs. 1,60,200 ; Asset side Rs. 3,26,700)
506 A Textbook of Financial Cost and Management Accounting
(2) A Contractor's firms, having undertaken construction work at a contract price of Rs. 2,50,000, began the execution of
the work on 1st July 2003. The following are the particulars of the contract up to 31st December 2003 :
Machinery installed at site 15,000
Materials sent to site 85,349
Labour at site 74,375
Chargeable expenses 3,167
Overhead allocated 4,126
Materials returned from site 550
Work certified by the Architect 1,95,000
Cash received 1,50,000
~~~~~~~ed ~
Materials on hand 31.12.2003 1,883
Wages occurred due on 31.12.2003 2,690
Value of machinery as on 31.12.2003 11,000
Draw up the contract account showing therein the profit that should be taken to the credit of the profit and loss account
for the year ended 31st December 2003. Give reasons for your treatment of the profit on the uncompleted contract.
[Ans : Gross profit Rs. 28,226 ; Amount credited to profit and loss Nc Rs. 14,475]
(3) MIs Kishore and Company commence work on a particular contract on 1st April 1997. They close their books of
accounts for the year on 31st December each year. The following information is available from their closing records on 31.12.2003 :
Materials sent to site 50,000
Foreman's salary 12,000
Wages paid 1,00,000
A machine costing Rs.32,ooo remained in use on site for 1I5th of the year. Its working life was estimated at 5 years and
scrap value at Rs. 2000. A supervisor is paid Rs. 2000 per month and had devoted one-half of his time on the contract.
All other expenses were Rs.15,ooo. The material on site was Rs.9000. The contract price was Rs.4,oo,ooo on 31st
December, 2/3rd of the contract was completed. However, the Architect gave certificate only for Rs. 2,00,000 on which
75% was paid.
Prepare the Contract Account in the Company's book.
[Ans: Notional profit Rs. 66,350, WIP Rs. 33,175]
(4) A Contractor obtained a contract for Rs. 6,00,000 on 1st January 2003. The expenses incurred during the year ended
31st December, 2003 were as under:
Materials 1,80,000
Wages paid 1,60,000
Wages occurred 10,000
Other expenses 25,000
The plant specially installed for the contract worth Rs. 45,000 was returned to the stores subject to the depreciation of
20% materials on 31st December 2003, were valued at Rs. 24,000.
Upto 31st December, the contractor had received Rs.3,6O,ooo in cash representing 80% of the Work Certified. Work
uncertified was estimated at Rs.4000. Prepare the Contract Account, showing the profit for the year. Also how the
value of work in progress would appear in the Balance Sheet as on 31st December 2003.
[Ans: Profit to P & L Nc Rs. 50,133.33; Profit to reserve Rs. 43,866.67]
(5) Write up a contact account from the following particulars:
Direct materials 39,600
Wages 26.400
Special plant 17,600
Stores issued 7,040
Loose tools 3,300
Cost of Tractor:
Running materials 2,200
Wages of driver 3,520
Other direct charges 2,640
The contract was completed in 13 weeks at the end of which period the plant was returned subject to a depreciation of
15% on the original cost. The values of loose tools and stores returned were Rs. 2,200 and Rs. 890 respectively. The
value of the factor was Rs. 20,000 and a depreciation was to be charged to this contract at the rate of 15% per annum.
You are required to provide administration expenses at the rate of 10% on the total works cost.
[Ans : Administration cost Rs. 8,500; works cost Rs. 85,000]
Contract Costing 507
(6) Gupta & Co. Ltd. commenced the work on a particular contract on I" April 2003. They close their books of accounts for
the year on 31" December each year. The following information is available from their costing records on 31" December 2003.
Rs.
Material sent to site 5,00,000
Furemen's Salary 1,20,000
Wages paid 10,00,000
A machine costing Rs. 3,20,000 remained in use on site for 115'" of the year. Its working life was estimated at 5 years
and scrap value at Rs. 20,000. The supervisor is paid Rs. 20,000 per month an had devoted one-half of his time on the
contract.
All other expenses were Rs. 1,50,000. The materials on site were Rs. 90,000. The contract price was Rs. 40,000. On 31"
December 2003, 213 of the contract was completed; however the Architect gave certificate only for Rs. 20,00,000 on
which 75% was paid. Prepare the contract Account.
[Ans: Contract Alc: National profit Rs. 6,63,500; Estimated total cost of contract Rs. 26,73,000; Cost of work certified
Rs. 4,45,500]
(7) Pandey & Co. Ltd. undertook a contract for erecting a sewerage treatement plant for a city for a total value of Rs. 2.4
crores. It was expected that the contract would be completed by 31" March 2003. You are required to prepare a contract account for
the year ending 31" March 2002 from the following particulars :
Rs.
(a) Materials 30lakhs
(b) Wages 60 lakhs
(c) Overheads 121akhs
(d) Special plant 20lakhs
(e) Depreciation @ 10% to be provided on plant.
(0 Materials laying at site on 31.12.2002 Rs. 4 lakhs
(g) Work certified was to the extent of Rs. 1.6 crores and 80% of the same was received in cash.
(h) 5% of the value of material issued and 6% of wages may be taken to have been incurred for the portion of the work
completed but not yet certified.
(i) Overheads are charged as a percentage of direct wages.
(j) Ignore depreciation on plant for use on uncertified portion of the work.
(k) Ascertain the amount to be transferred to Profit & Loss Alc on the basis of realized profit.
[Ans: Work uncertified Rs. 58,02,000; Amount transferred to P&L Alc Rs. 35,10,400; National Profit Rs. 65,82,000]
(8) Gupta & Co. Ltd. Civil Engineering Contractor propose to tender for the construction of a Seminar Hall in a Educational
Institution and estimate their direct costs as Rs. 15,00,000.
Rs.
Direct Materials 6,00,000
Direct Labour (2100 man days of various categories) 6,30,000
Cost of transport of men and materials to work site 1,70,000
Other direct expenses 1,00,000
Existing commitments of modem construction for the year necessitate an overhead expense of Rs. 85,05,000 against
execution of works, the direct labour cost of which amount to 56,70,000. Assuming that whole of the overhead expense
is variable (for the sake of simplicity and tendering calculate the estimated value of tendering duly providing for
(a) necessary overheads (b) Interest at 5% on the average of capital outlay and (c) 10% margin.
[Ans: Price to be quoted Rs. 27,56,740]
(9) From the following information of Nigma & Co. Ltd. prepare the contract account for 2003. Also show what part of the
p. '''t on the contract should be taken credit of 2003? The contract price for Rs. 80,00,000.
Rs.
Materials issued from stores 15,00,000
Wages paid 22,00,000
General charges 80,000
Plant instalIed at Site on I~ July 2003 4,00,000
Materials on hand at close 80,000
Wages accurred due 80,000
Work certified 40,00,000
Work com pled but not certified 1,20,000
Cash received 30,00,000
508 A Textbook of Financial Cost and Management Accounting
Materials transferred to other contracts 80,000
Materials received from other contracts 20,000
Depreciation on plant is to be provided at 10% P.A.
[Ans: National profit Rs. 3,80,000; Work uncertified Rs. 1,20,000; Transfer to P&L Nc Rs. 1,90,000]
(10) The following is the information relating to contract No. 555
Rs.
Contract price 6,00,000
Wages 1,64,000
General Expenses 8,600
Raw materials 1,20,000
Plant 20,000
As on date, cash received was Rs. 2,40,000 being 80% of work certified. The value of materials remaining was
Rs. IO,OOO. Depreciate plant by 10%. Prepare contract Account showing profit to be credited to Profit and Loss Nc.
[Ans: National profit cld Rs .. 3,00,000; Transfer to P&L Nc Rs. 8,213]

DOD