Contract Costing Cost and Management Accounting

CAP II ICAN

Contract costing is that form of specific order costing under which each contract is treated as
cost unit and cost are accumulated and ascertained separately for each contract. It involves two
parties: contractor and contractee.

Features:

 Higher proportion of direct cost

 Low indirect cost
 Difficulties of cost control
 Surplus material

ACCOUNTING ASPECTS:

Accounting for material:

1. Material issued from store

Contract A/c Dr.
To store control A/c Cr
2. Material returned from store:
Store control A/c Dr.
To Contract A/c Cr
3. Material transferred to another contract:
Transferee contract A/c Dr.
Transferor Contract A/c Cr.
4. Sales of Material
Cash/Bank A/c Dr.
Contract A/c Cr.
5. For abnormal Loss of materials
Costing Profit and Loss A/c Dr
To Contact A/c Cr
6. Material Supplied by contratee without affecting the contract price
Such material should not be charged to contract A/c.

Accounting for Labours

Wage paid to workers engaged on a particular contract:

Wages A/c Dr.
To contract A/c Cr.
Wage paid to worker who move from one contract to another (i.e. indirect
expenses such as engineers, surveyors, supervisors etc)
Such wages are distributed over the contracts on the basis of time spent by the workers
on each contract or on some suitable basis such as percentage of direct material or
labour.

Accounting for direct expenses:

They are charged directly to the respective contracts.

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Accounting for plant and Machinery:

1. When plant is purchased specifically for the contract

Contract a/c is debited with the cost of the plant and is credited with the depreciated
value of plant at the end.
2. Where plant is issued from stores for a short period:
Contract a/c is debited with the amount of depreciation for the period.
3. Where the plant is taken on hire:
Contract a/c is debited with the amount of hire charge

Important as well as frequently used terms used on contract costing:

Work certified: Portion of the work completed which has been certified/ approved by the
contractee’s architect or surveyor and valued in term of contract price.
Accounting treatment:
Work in progress A/c (value) Dr.
To contract A/c Cr.
(same entry for work uncertified also)
It is transferred to the debit of contract account at the beginning of next accounting period.

Work Uncertified: Portion of work completed which has not been certified and is valued at
cost.

Total cost to date

Less: cost of work certified

Material in hand

Plant at site

Cost of work uncertified

Accounting treatment:
Work in progress A/c (cost) Dr.
To contract A/c Cr.
It is transferred to the debit of contract account at the beginning of next accounting period.

Retention money: Value of work certified – cash received

Notional profit: Value of work certified – cost of work certified

Profit to be credited to profit and Loss A/c in case of incomplete contract

Value of Work certified less than 25% of Contract price No profit,

all in reserve

Equal to or more than 25% but less than 50% 1/3 * Notional Profit * Cash
received/work certified

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Equal to or more than 50% but less than 90% 2/3 * Notional Profit * Cash
received/work certified

Equal to or more than 90%

a. Estimated profit* work certified/contract price

b. Estimated profit* work certified/contract price * cash received/work certified
c. Estimated profit* Cost of wok till date/Estimated total cost
d. Estimated profit* Cost of wok till date/Estimated total cost* cash received/work
certified
e. Notional profit* work certified/contract price
f. Notional profit* fraction based on completion stage* work certified/contract price

Provision for foreseeable losses: When current estimates of the total contract cost and
revenue indicates a loss, provision should be made for the entire loss on the contract
irrespective of the amount of work done and method of accounting followed.

Question No.1 The following was the expenditure on a contract for Rs.600,000
commenced in January, 2006:
Material Rs. 120,000, wage Rs.164,000, plant Rs. 20,000, business charges Rs.8,600
Cash received on account to 31 st December, 2006 amounted to Rs.240,000 being 80% of
work certified; the value of materials in hand as on 31-12-2006 was Rs.10,000. Prepare
contract account for 2006 showing the profit to be credited to the year’s profit and loss
Account. Plant is to be depreciated at 10%.

Question No.2 An expenditure of Rs. 192,000 has been incurred on a contract upto the
end of 31st March, 2007. The value of wok done and certified is Rs.210,000. The cost of
wok done but not yet certified is Rs.12,000. It is estimated that the contract will be
completed by 30th june 2007 and an additional expenditure of Rs. 18,000 will have to be
incurred to complete the contract. The total estimated expenditure on the contract is to
include a provision of 12 ½ percent for contingencies. The contract price is Rs.280,000
and Rs. 168,000 has been realized in cash up to 31 st march 2007. Calculate the
proportion of profit to be taken to profit and loss Account as on 31 st March 2007 under
different methods.

Escalation Clause: This clause is usually provided in the contracts as a safeguard against any
likely changes in the price or utilization of material and labour. If during the period of execution
of a contract, the prices of materials or labour rise beyond a certain limit, the contract price will
be increased by an agreed amount. Inclusion of such a term in a contract deed is known as an
'escalation clause'
An escalation clause usually relates to change in price of inputs, it may also be extended to
increased consumption or utilization of quantities of materials, labour etc. In such a situation
the contractor has to satisfy the contractee that the increased utilization is not due to his
inefficiency.

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Cost Plus Contracts: This type of contract is generally adopted when the probable cost of
contract cannot be ascertained in advance with reasonable accuracy. In this type of contract, the
contractor receives his total cost plus a profit, which may be a percentage of cost. These types of
contracts give protection to the contractor against fluctuations in profits as he is guaranteed
about his profit irrespective of the actual costs. However in order to avoid any dispute in future,
it is always advisable to specify the admissible costs in advance. Similarly the customer may also
reserve the right of demanding ‘cost audit’ in order to check the reliability of the claim of the
contractor regarding increase in the costs.

Target- price contracts: In such cases, the contractor receives an agreed sum of profit over his
predetermined costs. In addition, a figure is agreed as the target figure and if actual costs are
below this target, the contractor is eligible for bonus for the savings.

Question No.1 Brock Construction Ltd. commenced a contract on November 1, 2003. The total
contract was for Rs. 39,37,500. It was decided to estimate the total profit on the contract and to
take to the credit of P/L A/c that proportion of estimated profit on cash basis, which work
completed bore to the total contract. Actual expenditure for the period November 1, 2003 to
October 31, 2004 and estimated expenditure for November 1, 2004 to March 31, 2005 are given
below:
November 1,2003 to November 1,2004 to
October 31, 2004(Actual) Rs. March 31 , 2005 (Estimated) Rs.
Material issued 6,75,000 12,37,500
Labour Paid 4,50,000 5,62,500
Prepaid 25,000
Outstanding 2,500
Plant purchased 3,75,000
Expenses Paid 2,00,000 350,000
Outstanding 50,000 25,000
Plant return to store 75,000 300000
(Historical cost) (on March 31, 2004) (on March 31, 2005)
Work certified 20,00,000 full
Work uncertified 75,000
Cash received 17,50,000
Material at site 75,000 37,500
The plant is subject to annual depreciation @ 33% on written down value method. The contract
is likely to be completed on March 31, 2005.
Required
Prepare the contract A/c. Determine the profit on the contract for the year November, 2003 to
October, 2004 on prudent basis, which has to be credited to P/L A/C?

(Ans.P/L 148,580)

Question No.2 Paramount Engineers are engaged in construction and erection of a bridge
under a long-term contract. The cost incurred up to 31.03.2001 was as under:
Fabrication Rs. In Lakhs
Direct Material 280
Direct Labour 100
Overheads 60

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440
Erection costs to date 110
550
The contract price is Rs. 11 crores and the cash received on account till 31.03.2001 was Rs.6
crores. The technical estimate of the contract indicates the following degree of completion of
work.
Fabrication – Direct Material – 70%, Director 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 31.03.2001.

Question No.3 Modern Construction Ltd. obtained a contract No. B-37 for Rs.40 lakhs. The
following balances and information relate to the contract for the year ended 31st March, 2008:
1.4.2007 31.3.2008
(Rs.) (Rs.)
• Work-in-progress:
• Work certified 9,40,000 30,00,000
• Work uncertified 11,200 32,000
• Materials at site 8,000 20,000
• Accrued wages 5,000 3,000
Additional information relating to the year 2007-2008 are:
(Rs.)
• Materials issued from store 4,00,000
• Materials directly purchased 1,50,000
• Wages paid 6,00,000
• Architect’s fees 51,000
• Plant hire charges 50,000
• Indirect expenses 10,000
• Share of general overheads for B-37 18,000
• Materials returned to store 25,000
• Materials returned to supplier 15,000
• Fines and penalties paid 12,000
The contractee pays 80% of work certified in cash. You are required to prepare:
(i) Contract Account showing clearly the amount of profits transferred to Profit and Loss
Account.
(ii) Contractee’s Account.
(iii) Balance Sheet

Question No.4 A contract is estimated to be 80% complete in its first year of construction as
certified. The contractee pays 75% of value of work certified, as and when certified and makes
the final payment on the completion of contract. Following information is available for the first
year:
(Rs.)
Cost of work-in-progress uncertified 8,000
Profit transferred to Profit & Loss A/c at the end of year I on incomplete contract 60,000
Cost of work to date 88,000
Calculate the value of work- in-progress certified and amount of contract price.
(Ans: Rs.250,000)

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Question No.5 SB Constructions Limited has entered into a big contract at an agreed price of
Rs. 1,50,00,000 subject to an escalation clause for material and labour as spent out on the
contract and corresponding actuals are as follows:
Standard Actual
Quantity Rate per Quantity Rate
(Tonnes) (Tonnes) (Tonnes) (Tonnes)
Material: Rs. Rs.
A 3,000 1,000 3,400 1,100
B 2,400 800 2,300 700
C 500 4,000 600 3,900
D 100 30,000 90 31,500
Labour:
Hours Hourly Rate Hours Hourly Rate
(Rs.) (Rs)
L1 60,000 15 56,000 18
L2 40,000 30 38,000 35
You are required to:
(i) Give your analysis of admissible escalation claim and determine the final contract price
payable.
(ii) Prepare the contract account, if the all expenses other than material and labour related to
the contract are Rs.13,45,000.

Question No.6 A contractor commenced a contract on 1-7-2011. The costing records

concerning the said contract reveal the following information as on 31-3-2012.
Amount
(Rs.)
Material sent to site 7,74,300
Labour paid 10,79,000
Labour outstanding as on 31-3-2012 1,02,500
Salary to Engineer 20,500 per month
Cost of plant sent to site (1-7-2011) 7,71,000
Salary to Supervisor (3/4 time devoted to contract) 9,000 per month
Administration & other expenses 4,60,600
Prepaid Administration expenses 10,000
Material in hand at site as on 31-3-2012 75,800
Plant used for the contract has an estimated life of 7 years with residual value at the end of life
Rs.50,000. Some of material costing Rs.13,500 was found unsuitable and sold for Rs.10,000.
Contract price was Rs.45,00,000. On 31-3-2012 two third of the contract was completed. The
architect issued certificate covering 50% of the contract price and contractor has been paid
Rs.20,00,000 on account. Depreciation on plant is charged on straight line basis.
Prepare Contract Account (Ans: P/L 160,178 WIP Reserve: 110,122)

Question No.7 AKP Builders Ltd. commenced a contract on April 1, 2005. The total contract
was for Rs.
5,00,000. Actual expenditure for the period April 1, 2005 to March 31, 2006 and estimated
expenditure for April 1, 2006 to December 31, 2006 are given below:

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2005-06 2006-07 (9 months)

(Actuals) Rs. (Estimated)Rs.

Material Issued 90,000 85,750

Labour : Paid 75,000 87,325
Outstanding at the end 6,250 8,300
Plant 25,000 −
Sundry Expenses : Paid 7,250 6,875
Prepaid at the end 625 −
Establishment charges 14,625 −
A part of the material was unsuitable and was sold for Rs.18,125 (Cost being Rs.15,000) and a
part of plant was scrapped and disposed of for Rs.2,875. The value of plant at site on 31 March,
2006 was Rs.7,750 and the value of material at site was Rs.4,250. Cash received on account to
date was Rs. 1,75,000, representing 80% of the work certified. The cost of work uncertified was
valued at Rs.27,375.
The contractor estimated further expenditure that would be incurred in completion of the
contract:
♦ The contract would be completed by 31st December, 2006.
♦ A further sum of Rs.31,250 would have to be spent on the plant and the residual value of the
pant on the completion of the contract would be Rs. 3,750.
♦ Establishment charges would cost the same amount per month as in the previous year.
♦ Rs. 10,800 would be sufficient to provide for contingencies.
Required:
Prepare Contract account and calculate estimated total profit on this contract. Profit
transferrable to Profit and Loss account is to be calculated by reducing estimated Profit in
proportion of work certified and contract price.
(Ans: P/L 29,960.55 WIP Reserve 28,539.45)

Question No.8 From the following particulars compute a conservative estimate of profit by 4
methods on a contract which has 80 percent complete:
Rs.
Total expenditure to date 8,50,000
Estimate further expenditure to complete the contract 1,70,000
Contract Price 15,30,000
Work Certified 10,00,000
Work not certified 85,000
Cash received 8,16,000

Question No. 9 (RTP May 2014) Hut-to-Palace Ltd. undertook a contract in last year. In the
agreement between the Hutto- Palace Ltd. and the contractee, there is a clause stating that Hut-
to-Palace Ltd. will receive total cost plus 40% as contract consideration. The following are the
details of the contract as on 31st March, 2014:
(Rs)
Total expenditure to date 17,64,525
Estimated further expenditure to complete the contract 8,38,645
Value of work certified 21,07,500

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Cost of work not certified 3,11,075

Progress payment received from the contractee 14,75,250
From the above information calculate the
(i) Conservative estimate of profit for the management of Hut-to-Palace Ltd.
(ii) What would be the estimated profit from the contract if management of Hut-to- Palace Ltd
has come to know that the contractee has liquidity crunch and it is not able to pay further
payments.

Question No. 10 (ICWA) Deluxe Ltd. undertook a contract for Rs.5,00,000 as on 1st July 2006.
On 30th June 2007, when the accounts were closed, the following details about the contract
were gathered.
Particulars Amount Rs.’000s
Materials purchased 100
Wages paid 45
General expenses 10
Plant purchased 50
Materials on hand on 30th June 2007 25
Wages accrued on 30th June 2007 5
Work certified 200
Cash received 150
Work uncertified ed 15
Depreciation of plant 5
The above contract contained an escalation clause which read as follows.
‘ In the event of materials and rates of wages increase by more than 5% the contract price would
be increased accordingly by 25% of the rise in the cost of materials and wages beyond 5% in
each case’.
It was found that since the date of signing the agreement, the prices of materials and wage rates
increased by 25%. The value of work certified does not take into account the effects of the above
clause. Prepare Contract Account. Working should form part of your answer.
(Ans: P/L 20,000 Reserve:60,000 escalation 5,000)

Question No.11 (ICWA) Prabhu Builders Ltd. commenced work on 1st April 2005 on a contract
of which the agreed price was Rs. 5 lakhs. The following expenditure was incurred during the
year up to 31st March 2006.
Particulars Amount Rs.
Wages 1, 40, 000
Plant 35, 000
Materials 1, 05, 000
Head office expenses 12, 500
Materials costing Rs.10, 000 proved unsuitable and were sold for Rs.11, 500 and a part of plant
was scrapped and sold for Rs.1, 700. Of the contract price Rs.2, 40, 000 representing 80% of
work certified had been received by 31st March 2006 and on that date the value of the plant on
the job was Rs.8, 000 and the value of materials was Rs. 3, 000. The cost of work done but not
certifi ed was Rs.25, 000.
It was decided to [a] Estimate what further expenditure would be incurred in completing the
contract. [b] Compute from the estimate and the expenditure already incurred, the total profit
that would be made on the contract and [c] Ascertain the amount of profit to be taken to the

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credit of Profit and Loss Account for the year ending on 31st March 2006. While taking profit to
the credit of Profit and Loss A/c, that portion of the total profit should be taken which the value
of work certified bears to the contract price. Details of the estimates are given below.
i. That the contract would be completed by 30th September 2006
ii. The wages to complete would amount Rs.84, 750
iii. That materials in addition to those in stock on 31st March 2006 would cost Rs.50, 000
iv. That further Rs.15, 000 would have to be spent on plant and the residual value of the plant on
30th September 2006 would be Rs.6, 000
v. The head office expenses to the contract would be at the same annual rate as in 2005-06.
vi. That claims, temporary maintenance and contingencies would require Rs.9, 000
Prepare contract account for the year ended 31st March 2006 and show your calculations of the
sum to be credited to Profit and Loss A/c for the year.
(Answer: P/L 36,120 Reserve: 19,080)

Question No.12 Dream house (P) Ltd. is engaged in building two residential housing projects in
the city. Particulars related to two housing projects are as below:
HP-1 (Rs.) HP-2 (Rs.)
Work in Progress on 1st April 2013 7,80,000 2,80,000
Materials Purchased 6,20,000 8,10,000
Land purchased near to the site to open an office - 12,00,000
Brokerage and registration fee paid on the above purchase - 60,000
Wages paid 85,000 62,000
Wages outstanding as on 31st March, 2014 12,000 8,400
Donation paid to local clubs 5,000 2,500
Plant hire charges paid for three years effecting from 1st
April 2013 72,000 57,000
Value of materials at site as on 31st March, 2014 47,000 52,000
Contract price of the projects 48,00,000 36,00,000
Value of work certified 20,50,000 16,10,000
Work not certified 1,90,000 1,40,000
A concrete mixture machine was bought on 1st April 2013 for Rs. 8,20,000 and used for 180
days in HP-1 and for 100 days in HP-2. Depreciation is provided @ 15% p.a.( this machine can
be used for any other projects)
As per the contract agreement contractee shall retain 20% of work certified as retention money.
Prepare contract account for the two housing projects showing the profit or loss on each project
for the year ended 31st March, 2014.

Question No.13 One of the building contracts currently engaged in by a construction company
commenced 15 months ago and remained unfinished. The following information relating to the
work on the contract has been prepared for the year just ended:
Amount in ‘000
Contract Price 2,500
Value of work certified at the end of the year 2,200
Cost of work not yet certified at the end of the year 40
Cost incurred:
Opening balances:

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Case of work completed 300

Material on site (physical stock) 10
During the year:
Material delivered to site 610
Wages 580
Hire of plant 110
Other expenses 90
Closing balances
Material on site (physical stock) 20
As soon as materials are delivered to the site, they are charged to the contract account. A record
is also kept of materials as they actually used on the contract. Periodically a stock check is
maintained and any discrepancy between book stock and physical stock is transferred to a
general contract material discrepancy account. This is absorbed back to each contract, currently
at the rate of 0.5 of materials booked. The stock check at year end and revealed a stock shortage
of Rs.5,000.
In addition to the direct charges listed above, general overheads are charged to contract at 5%
of the value of work certified. General overheads of Rs.15,000 had been absorbed into the cost
of work completed at the beginning of the year.
It has been estimated that further costs to complete the contract will be Rs.220,000, this
estimate includes the cost of materials on site at the end of the end of year finished and also a
provision for rectification.
Required:
1. Determine the profitability of the above contract and recommend how much profit to
nearest (Rs.’000) should be taken for the year ended. (provide a detailed schedule of
costs)
2. State how your recommendation in (b) would be affected if the contract price
Rs.40,00,000 (rather than Rs) 25,00,000) and if no estimates has been made of costs to
completion. (if required, suitable assumption should be made by the candidate)
Question No. 14 A Construction Company under taking a number of contracts, furnished the
following data relating to its uncompleted contracts as on 31 st march, 1996.
Contract Number (Rs. In Lacs)
723 726 729 731
Total contract price 23.20 14.40 10.08 28.80
Estimated costs on completion of contract 20.50 11.52 12.60 21.60
Expenses for the year ended 31.03.96
Direct material 5.22 1.80 1.98 0.80
Direct Wages 2.32 4.32 3.90 2.16
Overhead (Excluding Depreciation) 1.06 2.60 2.62 1.05
Profit reserve as on 01.04.95 1.50 - - -
Plant issued at cost 5.00 3.50 2.75 3.00
Material at site on 01.04.95 0.75 - - -
Material at site on 31.03.96 0.45 0.20 0.08 0.05
Work certified till 31.03.95 4.65 - - -
Work certified during the year 1995-96 12.76 13.26 7.56 4.32
Work uncertified as on 31.03.96 0.84 0.24 0.14 0.18
Progress payment received during the year 9.57 9.00 5.75 3.60

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Depreciation @ 20% per annum is to be charged on the plant issued. While the contract No. 723
was carried over from last year, the remaining contracts were started in the 1 st week of April,
1995, required.
a. Determine the profit/loss in respect of each contract for the year ended 31 st march,
1996.
b. State the profit/loss to be carried to profit & loss account for the year ended 31 st March,
1996.
Question No.15 A contractor, who prepares his account on 31 st December each year,
commenced a contract on 1st April 1990. The costing records concerning the said contract reveal
the following information on 31st December, 1990:
Material Charged to site 258,100
Labour engaged 560,500
Foreman salary 79,300
Plant costing Rs.260,000 had been on site for 146 days. The working life is estimated at 7years
and their scrap value at Rs. 15,000. A supervisior, who is paid Rs.4,000 p.m has devoted
approximately three fourth of his time to this contract. The administrative and other expenses
amount to Rs. 140,000. Materials in hand at site on 31 st December 1990 cost Rs.25,400. Some of
the materials costing Rs.4,500 was found unsuitable and was sold for Rs.4,000 and a part of the
plant costing Rs.5,500 (on 31.12.90) unsuitable to the contract was sold at a profit of Rs.1,000.
The contract price was Rs.22,00,000 but it was accepted by contractor for Rs. 20,00,000. On 31 st
December 1990, two thirds of the contract was completed. Architects certificate has been issued
covering 50% of the contract price and Rs.750,000 had so far been paid on account. Prepare
contract account and state how much profit or loss should be included in the financial accounts
to 31st December 1990. Workings should be clearly given. Depreciation is charged on time basis.
Also prepare the contractee’s account and show how these accounts should appear in the
balance sheet on 31st December 1990.

Provisions for foreseeable loss

When current estimates of total contract costs and revenue indicate a loss, provision should be
made for the entire loss on the contact irrespective of the amount of work done and the
methods of accounting followed.

Profit and loss A/c (current period loss plus foreseeable loss) Dr.

Reserve for contingency A/c (additional loss) Cr.

(Both are shown on contract account)

And reserve for contingency is presented under head work in progress in balance sheet.

Question No. 16 The following particulars are obtained from the books of Kalika construction
as on March 2013.

Plant and Equipment at cost Rs.490,000

Vehicles at cost Rs.200,000

Details of contract which remains uncompleted as on 31.03.2013:

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Contracts No. A1 A2 A3

Estimated final sales value 8.00 5.60 16.00

Estimated final cost 6.40 7.70 12.00

Wages 2.40 2.00 1.20

Materials 1.00 1.10 0.44

Overheads (including Depreciation) 1.44 1.46 0.58

Total cost to date 4.84 4.56 2.22

Value certified by architects 7.20 4.20 2.40

Progress payment received 5.00 3.20 2.00

Depreciation of plant and equipments and vehicle should be charged at 20% to the three
contracts in proportion to work certified.

You are required to prepare statements to show contract wise and total:

1. Profit/loss to be taken to the P & L account for the year ended 31 st March 2013:
2. Work in progress as would appear in the balance sheet as at 31 st March 2013.

Question No.17 A contract for construction of building is governed by an escalation clause in

respect of prices of steel, cement and stone aggregate. The prices ruling on the date of tender for
the building and the actual prices paid by the contractor were as follows:

On the date of tender Actual

Steel per ton 610 675

Cement per ton 100 105

Stone aggregate per 100 c. ft 40 38

300,000 c. ft of reinforced cement concrete was laid in the building. If 100 lbs of steel, 2400 lbs
of cement and 90 c. ft of stone are the net quantities required to cost 100 c. ft of RCC and the
wastages are 5, 3 and 10 per cent respectively. Calculate the differences in selling price
according to escalation clause (1 ton = 2240 lbs). (assume the wastage percentage on the net
quantity of material).

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