Contract account

job and contract costing

1. Job and contract costing Cost Accounting-II (Bcom Sem -4) Commerce Gokul College of Commerce and management

2. Presented By Asst .Prof Gianchandani Damini H

3. CO S T I N G “The techniqueand process of ascertaining costs.” Contract Costing Batch C o s ting Single Costing Pr o c e ss C o s ting Job Costing Operating Costing Mul t iple Costing

4. Job costing Determine the cost of specific jobs or lots of production, work order or project separately. Manufacturing firm like presses, machine- tool and non-manufacturing concern general engg. Workshop & Auto Repair shop, It is used in Job order Industries

5. Objectives of Job costing Determine profit or loss of each job, the actual costs are compared with the estimated costs, so to ascertain correct estimation & separate the profitable jobs from the unprofitable ones. Helps in minimizing the losses & maximizing profits, Cost per unit can be ascertained

6. Feature of job costing Jobs are ascertained against the order of customers, Production is not meant for stock or future sale, Not a continuous process, Different degrees of attention & skills are required for different jobs, each job so, no uniformity in Nature of the job decides the process of the flow of production, Separate cost sheet for each job

7. Advantages of Job costing Distinguish profitable from the unprofitable jobs, Assist in preparing the estimation, Detailed analysis of cost elements & functions, Helps in future production planning, Cost data helps in preparing budgets, Spoilage & defective work can be discovered, Facilitates in cost plus contracts, Helps m anag e m e n t in f i xing SP of spe c i a l order s ,

8. Disadvantages of job costing Expensive as it involves more clerical work. Historical costing in nature, so it doesn’t give the prompt remedial measures Non-comparable More chance of mistakes Not much use for control purpose

9. Contract Costing Variant of job costing, Applies to construction works, Individual cost unit (individual jobs)& cost centre (department or process),

10. Contract Costing is defined by the ICMA Terminology as

11. Feature of contract accounting Each contract is treated as a cost unit . A separate account for eachcontract. Work is done at site , away from contractor’s own premises. The contract has a long duration usually extending more than one accounting year. All items of cost which are directly related to the contract are chargeable to respective contract accounts. Payment is made by contractee on the basis of work certified by surveyor or architect. Penalties or extra money may be imposed. Though contract costing is a part of Cost Accounting, but it is purely based on the principles of Financial Accounting .

12. Advantages of Contract Costing Work can be completed without any delay A contractor can find the total cost of the contract, cost per each element and the amount of profit available from each contract. There is no possibility of incurring loss since all the costs incurred are recovered from the contractee. If the value of a contract is heavy, the cost plus contract method is usually adopted. The contractee can exercise effective control on the performance of the contract by having retention money.

13. Disadvantages of Contract account The contract account is not reflecting the efficiency of the contractor. The contractee is affected under the cost plus contract. The contractor does not care about the amount of expenses if he assumes work under cost plus contract. Disputes and differences often arise between the contractors and the contractees in many matters. If profit percentage is fixed, the contractor does not care about the quality in the performance of the contract .

14. Fixed Price Contract Fixed Price is agreed Deductions are made for Defectives and Penalties Extra money for additional work Cost Plus Contract compensates for costs actually incurred by contractor. a percentage of cost or any lump sum amount. Contract with Escalation Cost Mixture of both of the above. A fixed price will increase with increase in cost of material, labour.

15. Can you Say how much work has been completed ??? Can you Say how much work has been completed ??? New Building of Central Bank, Europe

16. “Work Certified is that proportion of the work completed which has been certified or and valued by the architect or surveyor.” Payment is made on the basis of Work Certified. “Work Uncertified is that part of the work completed which has not been certified/approved by the contractee’s architect or surveyor.” There is no role of Work Uncertified in payment. Accounting Treatment is same for both: Work-in-Progress A/c Dr. To Contract A/c

17. A Contractor does not receive full payment of the Work Certified by the surveyor. Contractee retains some amount to be paid, after sometime, when it is ensured that there is no fault in the work carried out by contractor. This retained money is called as Retention Money . Retention Money= Value of work Certified (-) Payment actually made

18. Particulars Amo u nt Particulars Amo unt To Material Purchased XXX By Work-in-progress: Work Certified Work Uncertified XXX XXX To Material received from stores XXX By Material Return to Stores XXX To Material from other contract XXX By Material sent to other contract XXX To Wages XXX By COST of Material Sold XXX To Indirect Expenses XXX By Material on Hand XXX To Plant & Machinery XXX By Plant on Hand XXX To Accrued Wages XXX To Accrued Expenses XXX To Notional Profit c/d XXX XXX XXX

19. Comp a rison b e t w een c o n t r act and Job costing Size : A job is small in size but the contract is big in size. Place of work : Work under job costing is performed in the workshop but the contract is executed mostly atsite. Time for completion : A job usually takes less time for completion whereas a contract takes more time to complete thework. Payment of price : The selling price of a job is paid in full after completing the job But incase of contract, the price is paid in various installments depending upon the progress of the work. Investment : There is heavy investment on assets incase of job costing as compared to contract costing.