Topic 9 Contract Costing

Topic

Contract Costing

1. Contract price: Consideration payable by contractee to contractor.

2. Work in progress: It refers to the contract which is not complete at the reporting
date.
3. Work Certified: It is that portion of work completed for which certificate is obtained
from independent person like Engineer, Architect etc. Work Certified is always in terms
of contract price. Work certified includes profit. E.g. contract price is 1,00,00,000 and
work certified is 60% then amount of work certified will be 60,00,000.
4. Work Uncertified: It is that portion of work completed for which certificate is not
obtained. Work uncertified is always in terms of cost.
5. Progressive Payment: It is periodic payments from the contractee against the work done
to avoid working capital shortage. Generally payment is done on the basis of work
certified. E.g. Suppose contractee pays 80% of work certified. Amount paid is
6,40,000 then we can calculate work certified as 6,40,000/80% = 800000.
6. Retention Money: In a contract, a contractee generally keeps some amount payable to
contractor with himself as security deposit. To have a cushion against any defect or
undesirable work, the contractee upholds some money payable to contractor. This is
known as retention money. But if contract is completed as per terms of contract then
entire money will be paid at the end of the contract.
7. Notional Profit: Value of work certified – (Cost of work to date – Cost of work not
yet certified)
8. Estimated profit: contract price – estimated total cost.
9. Estimated total cost: cost already incurred + Cost to be incurred.
10. Escalation clause: Escalation clause in a contract empowers a contractor to revise the
price of the contract in case of increase in the prices of inputs. A contract takes longer
period to complete and the factors based on which price negotiation is done at the
time of entering into the contract may change till the contract completes. This protect
the contractor from adverse financial impacts and empowers the contractor to recover

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Topic 9 Contract Costing

the increased prices. As per this clause, the contractor increases the contract price if
the cost of materials, employees and other expenses increase beyond a certain limit.
Inclusion of such a clause in a contract deed is called an “Escalation Clause”.

Format of contract Account

Particulars Amount Particulars Amount

To Material at site b/d By Material Returned
To Plant at site b/d By Sale of Material
To WIP b/d By Loss on Sale of Material
Work certified By Plant Returned
Cost of work uncertified By Sale of Plant
To Material purchased By Loss on sale of plant
To Material Issued from Stores By Material at site
To Wages By Plant at site
To Chargeable Expenses By Cost incurred till date
To Indirect/sundry Expenses c/d
To Establishment Expenses
To Plant issued Or Depreciation
To Salary
To Administration Charges
Total Total
To Cost Incurred till date b/d By WIP
To Costing Profit & Loss A/c Work certified
(notional profit for the period) Cost of work uncertified
Total Total

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Topic 9 Contract Costing

Cost of work uncertified:

Suppose cost of work uncerified is not given in question. E.g. 2/3 of the contract
completed but certificate is received only for 50%.

Work Certified Work Completed

50% 2/3 i.e. 66.667%
Work Uncertified
i.e. 16.667%
Suppose cost incurred till date is 2,00,000. Then cost of work uncertified =
2,00,000 X 16.667% = 50,000
66.667%

If in question actual data is given as well as estimated data is also given. For e.g.
contract started on 1/4/2020. Actual data for year 20-21 is given. Contract is likely
to be completed on 31/12/2021. And estimated data from 1/4/2021 to 31/12/2021
is given. To calculate notional profit we will use actual data of 20-21. But to calculate
estimated profit we will use data from 1/4/2020 to 31/12/2021 (i.e. actual plus
estimated). Hence, we will prepare contract account for entire life of contract in our
example 21 months. Following adjustments are important:
1. We will never consider material at site and plant at site as on 31/03/2021.
2. Material returned or plant returned will be considered for both the period.
3. Material sold, plant sold will be considered for both the period.
4. Outstanding expenses, prepaid expenses at the end of actual period i.e.
31/03/2021 will not be considered
5. Outstanding expenses at the end of estimated period i.e. 31/12/2021 will be
considered.

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Topic 9 Contract Costing

Format of Contractee A/c

Particulars Amount Particulars Amount

To Balance C/d By Bank A/c
Total Total
To Contract A/c (if contract is By Balance B/d
completed) By Bank A/c

Total Total

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 Topic 9 Contract Costing

1. HKC commenced a commenced a contract on April 1, 2011. The total contract was for `
49,21,875. It was decided to estimate the total profit. Actual expenditure in 2011-12
and estimated expenditure in 2012-13 are given below:

Particulars Amount Amount

Material issued 7,76,250 12,99,375

Labour : Paid 5,17,500 6,18,750

Prepaid 37,500 --

Payable 12,500 5,750

Plant purchased 4,00,000 --
Expenses: Paid 2,25,000 3,75,000
Outstanding at the 25,000 10,000
end Prepaid at end 15,000 --
Plant returned to store (historical 1,00,000(30/09 3,00,000 (on 30/09/12)
cost) /11)

Material at site 82,500 42,500

Work certified 22,50,000 Full
Work uncertified 25,000 --
Cash received 18,75,000 --

The plant is subject to annual depreciation at 25% on WDV cost. The contract is likely
to be completed on 30 Sept 2012. Required: Prepare the contract account for the year
2011-2012. Estimate the profit on the contract for the year 2011-2012.

2. Escalation clause: Calculate the escalation amount from the following

Material issued to site 1,50,000

Wages paid 80,000
Wages pre-paid 5,000
Stock of material 20,000
Price of material increased by 30 % and wages by 20 %
Escalation: Contract Price will be increased by 50 % of rise in cost of material and
wages beyond 10 % in each case.