Contract-Costing

							                          Contract Costing:

Contract: A contract is nothing but a big job having following
features:

   1. A high price of thousands or lakhs of rupees.
   2. The period taken for completion may be many months or even
      years.
   3. The actual work may be done at a site away from the main office
      of the contractor.

Contract Costing:

                     Contract costing is the method of costing used to
find out the cost and profit of each contract for a given period.
Contract costing which applies where the work is undertaken to
customer’s special requirement and order which is of a longer duration
and which is carried out at site which is different from contractor’s
premises. Contract costing enables the contractor to ascertain and
control the cost of each job or contract.

Contract costing is applicable when the work is usually of
constructional nature for e.g. construction of road, building, dams,
erection of factories, bridges, and other civil engineering works, the
technique of contract costing is preferable.


Meaning of some important terms under contract costing.

   1. Contractor: Contractor is the person who undertakes the
      contract (job).

   2. Contractee: Contractee is the person for whom contract job is
      undertaken.

   3. Contract price: Contract price is the amount agreed to be paid
      by the contractee to the contractor as consideration for the job
      done. The contract price may be payable in lumpsum when work
      is completed. Alternatively, the amount may be paid in
      installments as the work progresses. The amount of each
      installment would depend on the amount of work done and
      certified by the architects.
4. Work Certified: In the case of large contract, normally the
   contractor receives on account payment against the value of the
   work completed at specific intervals. Work certified is that part
   of work completed for which the contractor gets the certificate of
   the architect. In the case of large contract, the contractor would
   expect the contractee to make a payments of the contract price
   in installments. He therefore, sends a part bill to the contractee
   as and when a portion of the work is completed. An architech,
   appoint in terms of the contract, between the contractor and
   contractee, scrutinizes the part bill, he certifies the work done
   for the purpose of payment. The work certified is related to the
   contract price and not to the cost of the work done. Suppose the
   contract price is Rs. 10 lacs, and the cost incurred to date by the
   contractor is Rs. 4 lacs. If half the work is done and certified,
   then the value of work certified will be half of Rs. 10 lacs, i.e. Rs.
   5 lacs. The value will have nothing to do with cost-to-date of the
   work done.
   Therefore. Work Certified = Cost of Work Certified + Profit

5. Work Uncertified: Work uncertified is that cost of work done
   which relates to the period between the date of work certified
   and accounting year ending. At the end of the accounting period,
   not all work done would have been certified by the architect.
   This would be so because the bill itself would not have been
   submitted by the contractor. Suppose the accounting period
   ends on 31st December. The contractore would have submitted
   his bills which would probably include all expenses incurred by
   him upto 10th December and this might be certified for the
   payment by the architech. The expences incurred by the
   contractor between 11th December and 31st December is the cost
   of work uncertified, This amount is always with reference to its
   cost and not at contract price as compared to the work certified
   which is at selling price.

6. Retention Money: Retention money is that part of work
   certified which is retained by the contractee so as to safeguard
   his interest in case of future defects in the work done. The
   contractee does not pay full amount of the value of work
   certified.He keeps certain amount till contract is complete. This
   amount so kept is by contractee is called retention money.
How to find profits from incomplete contract:

                   Performa of Contract Account

Contract A/c For the year     ended ……………………..
Particulars                   Rs.   Particulars                    Rs.
To Material Bought            XX    By Materials Lost (Cost)       XX
To Materials Issued From      XX    By Materials returned to       XX
Stores                        XX    stores                         XX
Material transfer to other    XX    By Materials Transf. to
contract                      XX    other contract                 XX
To Labour                     XX    By Closing stock of
To Direct Expenses            XX    material
To Indirect Expenses          XX                                   XX
To Depri. on Plant used             By Work-in-progress            XX
To Notional Profit                       Work Certified
                                         Work Unceritfied
                              XX                                   XX
                              XX
To Profit & loss A/C                By Notional Profit
To Reserve For
Contingency



Question: How to determine the amount to be transferred to
profit & loss account?

Ans. 1) Find out the % of work completed
     2) Find out the amount of profit to be transferred to profit & loss
.       account.

   1) Find the extent of work certified:

      The value of work certified is to compared with the total contract
price to ascertain             .     the % of the work completed.

Thus, % of work Certified = Amount of work certified         X 100
                                Total contract price
The standard rules for transferring the amount of such profit to P & L
A/c in relation to the extent of work completed.

 Extent or Work Completed:                             Profit to be Considered:

 0 to 24 %                                             N o profit is transferred to P&L a/c
 25 % or more but less than 49 %                       1/3rd of notional profit transferred
                                                       to P&L a/c & remaining in reserves
 50 % or more                                          2/3rd of notional profit is
                                                       transferred to P&L a/c & remaining
                                                       in reserves.
 100 % i.e. when entire contract is                    There is no need to keep ant
 complete.                                             reserve and the entire profit may
                                                       be credited to the P&L A/c

Note: In any case, whenever there is a loss. It should be entirely
debited to the profit and loss account irrespective of the stage of
completion. This is in accordance with the basic convention of
conservation followed by accountants.


   2) Find amount of profit to be transferred to profit & loss account
      based on % of completion of work:

Profit to be transferred to P&L A/c= Notional Profit X 1 or 2 X Cash Received
                                                       3    3 Work Certified