Contract Costing.pptx

contract costing
meaning
definition
features

1. Unit-4 Contract Costing

2. Meaning of Contract Costing It is one of the methods of costing which is applicable in where construction activities takes place. The duration of the contract work is generally more than a year and much time requires in completing the construction work. It involves more investment and labour for construction work.

3. Definition of Contract Costing According to CIMA, Contract costing is defined as, ”A form of specific order costing: attribution of costs to individual contracts”.

4. Application of contract Costing This method is applicable in construction of building, bridges, roads, dams and canals etc., This method is also called as Terminal costing . Contractor: is one who accepts the construction work from the party to complete in a definite period of time. Contractee: is the owner of construction work and for whom the construction work is assigned to the contractor to complete the construction work

5. Features /Importance of Contract costing A contract generally takes more than a year to complete Work on contract generally starts at the site of the contract and not in factory premises. Each contract undertaken is treated as a cost unit. Separate contract account to prepared to ascertain profit or loss on each contract. Most of the expenses are treated as direct expenses for the construction work. If contract work is not completed in a particular year, only proportionate of profit is transferred to profit and loss account based on the work completion.

6. Sub- contractors may be apportioned for other than construction work, such as electrical fittings, welding work, interior decoration etc., Plant & Machinery may be purchased for the site or hired for the site Contractee will pay the money to the contractor after holding certain percentage of money which is called retention money to safeguard the future construction work.

7. Similarities between Job Costing and Contract Costing Job Costing Contract Costing It is one of the method of costing It is one of the method of costing Commitment to customer special requirement Commitment to customer special requirement Each job is treated as separate entity for the purpose of costing Each Contract is treated as separate entity for the purpose of costing

8. Dissimilarities between Job Costing and Contract Costing Job Costing Contract Costing Jobs are performed inside the factory Contract work is performed outside the factory such as construction of bridges, roads and dams etc. The cost of each job is less The cost of each contract is huge or more The period of completion of each job is shorter duration The period of completion of each job is longer duration While executing the job, each job is given as separate job number and is executed by the same group of workers. While executing a contract sub-contract are given Calculation of profit or loss on each job is to be calculated for a period. If contract work is not completed during the period, Profit on each such contract shall be calculated proportionately.

9. Terms used in Contract Costing Retention Money: Certain percentage of money hold by the contractee while making the payment to the contractor is called Retention Money. The contractee may pay a fixed percentage of work certified, depending upon the terms of Contract.

10. Escalation Clause Contract generally takes long time to complete and in this period there may be possibility of change in prices. Escalation clause which protects the contractor against raise in the prices of materials or labour. The contractor is entitled to enhance the contract price if cost arises beyond a given percentage.

11. Cost Plus Contracts Cost plus contract is a contract in which the contract price is ascertained by adding a specified amount or percentage of profit to the cost allowed in the contract. Cost plus contract is usually entered into for executing special type of work like construction of dams buildings, power house etc.,

12. Work Certified As per the terms of the contract, the contractee advances certain percentage of amount or money to the contractor on the basis of the percentage of work done by the contractor and work certificate issued by the contractee’s architect or engineer periodically

13. Work Uncertified A Work is completed by the contractor but which remains to be certified by the architect on the date of accounting is known as ‘work done but not yet certified’

14. Contract Price It is the value of the contract agreed to be paid to the contractor by the contractee for completion of work according to the satisfaction of the contractee

15. Treatment of profit on incomplete contract Work certified +Work uncertified/contract Price*100 1. When work certified is less than1/4 (25%) of the contract price no profit is to transferred to the profit and loss account and the whole amount of such profit is treated as notional profit and is transferred to the reserve account

16. 2. If work certified is ¼ (25%) or more than ¼(25%)of the contract price but less than ½ (50%) of the contract price then 1/3 of the notional profit is transferred to the profit and loss account and the balance is to be transferred to the reserve account. The profit to be transferred to the profit and loss account is calculated as follows- 1/3 x notional profit x cash received / work certified

17. 3. If work certified is ½ (50%) or more than ½ (50%)of the contract price but near to the completion of the contract then½ (50%) of the contract price then 2/3 of the notional profit is transferred to the profit and loss account and the balance is to be transferred to the reserve account. The profit to be transferred to the profit and loss account is calculated as follows- 2/3 x notional profit x cash received / work certified

18. 4. When contract is near to the completion the estimated profit is calculated on the contract price. It is calculated as follows- Estimated profit x work certified /contract price OR Estimated profit x cash received / contract price

19. Accounting Procedure (Preparation of Contract Account) Materials: It includes the materials purchased directly from the suppliers or materials issued from the stores against materials requisition note. The costs of both are debited to the contract account. During the period if any materials found surplus and are returned to the stores, they are credited to the contract account. In case any materials are transferred from the site to other contracts, such materials also are credited to the contract account, if any materials received from other contracts are debited to the contract account.

20. Labour/Wages: The wages payable to the workers engaged on the contract are also debited to the contract account. If any wages are accrued or outstanding such outstanding charges are added to the wages. Plant and Machinery: If any assets are purchased like plant and machinery, tractors and any other assets are debited to the contract account. At the end of the year after depreciation the net value of assets are credited to the contract account. Alternatively only the depreciation amount on the assets is debited to the contract account.

21. Sub Contract: Is to be debited to contract account Any Profit on the sale of assets or part of it is debited to the contract account and credited to profit and loss account. Any Loss or fire or destroyed of any materials in transit or at the site are to be debited to the profit and loss account and credited to contract account.

22. Work in progress When contract work is not completed till the end of accounting period then it is called work in progress. The contractor is required to value the work in progress considering work certified and work uncertified . Both work certified and work certified will appear on the credit side of the contract account under the heading Work in progress account. Work certified: it is a part of work in progress which refers to work has been completed and approved and certified by an architect. Work Uncertified: it is also a part of work in progress , which refers to work on contract has been completed but is not certified or not approved by an architect.

23. Notional Profit It is an estimate of earnings primarily used in the building and the construction industry. it is used to smooth out fluctuation in reported revenue due to contract that take a long time to complete.