Contract costing

Contract Costing is a difficult one for accounting.
Basics of which, can be seen in this PPT. I hope it will help to understand what is Contract Costing and how its accounting can be done. Please Like if it proves to be helpful for you.

1. Contract costing

2. Contract Costing is defined by the ICMA Terminology as CONTRACT COSTING

3. Each contract is treated as a cost unit . A separate account for each contract. 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 . Such as Dual Aspect, Prudence and Conservatism. And AS9 (Revenue Recognition) Features of CONTRACT COSTING

4. TYPES OF CONTRACT (in costing)

5. Land Cost Site labour Cost Cost of material Depreciation on plant and equipments used at site Sub Contract Cost Cost of moving plant Cost of hiring Plant & Machinery Cost of design Maintenance Cost Guarantee & Warrantee Cost Penalties, etc. COST ATTRIBUTABLE TO CONTRACT A/C

6. General Administrative Cost Selling Cost Research & Development Cost Depreciation on ideal plant & equipment Cost of unconsumed material Advance payment to sub contractor Cost of material which is delivered to site for future Profit/Loss on sale of any material/plant COST not ATTRIBUTABLE TO CONTRACT A/C

7. Can you Say how much work has been completed ??? Can you Say how much work has been completed ??? This is why an architect or surveyor is needed & invited and his certificate is obtained about how much work has been completed. New Building of Central Bank, Europe

8. “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. WORK CERTIFIED WORK UNCERTIFIED Accounting Treatment is same for both: Work-in-Progress A/c Dr. To Contract A/c

9. 01/04/2015 – 31/03/2016 (ONE FINANCIAL YEAR) 01/04/2015 1.Starting of year 2. Starting /continuation of contract 31/10/2015 Assessment done by Architect or Surveyor and certified the work done, i.e. work certified 31/03 /2015 1.Ending of year 2. Date of payment 3. Closing of account of incomplete contract Work Done and certified Work Done but not certified WORK CERTIFIED WORK UNCERTIFIED

10. 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 Retention Money= Value of work Certified (-) Payment actually made

11. Particulars Amount Particulars Amount 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 SAMPLE OF CONTRACT A/C

12. As per the % of Work Completion, 3 stages of work completed is made which helps in transferring the amount to P&L Account. PROFIT DISTRIBUTION IN INCOMPLETE CONTRACT Stage Name % of Work Completion Formulae Initial Stage 0% to 24% No Profit will be transferred to P&L Work done but not Substantial 25% to 49% Substantial Work Done 50% to 100%

13. LIABILITIES Amount ASSETS Amount Work in Progress: XXX Work Certified XXX Costing P&L Account XXX (+)Work Uncertified XXX Contractee A/c XXX (-) Cash Received (XXX) Unpaid Expenses XXX (-) WIP Reserve (XXX) Unpaid Wages XXX Plant in Hand (Less Depreciation) XXX Material on Hand XXX Cash XXX SAMPLE OF BALANCE SHEET (EXTRACT) DON’T TRY TO T ALLY …. !!!

14. Shubham Verma v [email protected] Thanking You…