CONTRACT COSTING

NAME- HIMANSHU
ROLL NO.2201
M.COM HONS 2nd YEAR
 MEANING OF CONTRACT

COSTING
Contract costing is a part of specific order costing method
where work is performed as per requirement or specifications of
the customer or contractee.
 There are two parties -

1. Contractor-(is a person who perfomed work or

job as per requirment of contractee)
2. Contractee-(is a person for whom work is
perfomed by the contractor)
 Contract is a work or job of a large size
which continues in one or more
accounting year.
 FORMAT OF CONTRACT
ACCOUNT
CONTRACT ACCOUNT NO.

PARTICULARS AMOUNT PARTICULAR AMOUNT

To Materials- By Materials-
i. Direct Material Purchased XXX (i) Returned To Suppliers XXX
ii. Issued from stores XXX (ii) Returned To Stores XXX
iii. Transferred From other contract XXX XXX (iii) Transferred to other contract XXX
 To Wages XXX (iv) Sold XXX
Add- Outstanding wages XXX XXX (v) At Site/In Hand XXX XXX

 To Direct Expeses XXX By Plant-

 To Indirect Expenses XXX (i) Returned To Stores XXX
 To Plant- (II) Transferred To Other Contract XXX
(i) Cost Of Specific plant XXX (iii) Sold XXX
(ii) Depriciation of plant XXX (iv) At Site/In Hand XXX XXX
 P&L A/C ( profit on sale of plant or material) XXX By P&L A/C-
 To sub contract costs XXX (i) Material Lost Stolen orDestroyedXXX
 TO Cost Of Extra Work Done XXX (ii) Plant Lost, stolen, destroyed XXX
 To P&L A/C (Bal. Figure) XXX (iii) Loss On Sale Of Plant XXX XXX
 By ContracteeA/C(Contract Price In
 Case Of Completed Contract)+(
 Extra Work Price) XXX
 EXPLANATION OF VARIOUS ITEMS
SHOWN IN DEBIT SIDE AND CREDIT
SIDE OF CONTRACT ACCOUNT
(A) Explanation of items of debit side of contract account
i. Direct Materials- The Materials for the contract can be recieved from the
following sources-
(a) By issue from store room.
(b) By direct purchase from the market. All such materials which are not
availabe with the store keeper but are required for the contract are
purchased directly from the market.
(c) By transfer from other contract. When there are more than one contract
simultaneously being continued, then some material not being used in any
contract can be transferred to other contract.
(d) Material supplied by the contractee. Sometimes,thecontractee may supply
certain materials from his own stock for use in the works. Such materials
are not debited to the contract account but shown in separate
mamorandom record outside the accounts.
2. Direct Labour- Wages are to be charged to the particular contract directly. The
outstanding wages at the end of the accounting period should be added to wages.
3.Direct Expenses- The expenses incurred exclusively for aparticular contract are
treated as direct expenses and are chargeable to that contract for which incurred
4.Indrect Expebses or Overheads- The indirect expenses incurred commonly on
two or more contracts are called overheads. These overheads are generally
distributed and debited to contract account on the basis of direct wages or material
consumed or any other bases.
5. Plant & Machinery- In case of plant & machinery is being used for the contract
then cost of this shall be debited.
(a) In case of specific plant& machine- For a specific contract, any plant purchased
or issued from store which is to be used in the certain contract for longer period
of time, because it is an expense so, it is debited to contract account .
(b) Depriciation in plant & machinery- when plant is used for a limited period on
the contract, than contract account is debited.
6. Sub-contract cost- A contractor may not be expert in all the trades or functions
required tu exicute his project. So he may appoint sub-contractors to do
specific jobs. He may sub-cotracts to different parties. The contract account is
debited with thesub-contract cost.
7. Extra work done- Sometimes, a contractor is asked to do some extra work as
was not originally included in the agrement. The contractor is paid extra for
such jobsover the contract value originally agreed upon. The contract account is
debited with the cost of extra work done and the price recived for this extra
work is shown added to the contract price.
(B) Explanation the credit side of the contract accounts-
1.Materials- In the credit side of contract account
following items related to material are shown.
(a). Material related to the supplier.
(b). Material returned to store.
(c). Mterial transferred.
(d). Materials at the end.
2.Plant- (a).Returned to store.
(b).Transferred to other contract.
(c) At site/ In hand.
(d) Sold
 IF THE CONTRACT IS
COMPLETE
PARTICULAR AMOUNT PARTICULAR AMOUNT
To Materials XXX By materials returned XXX
To wages XXX By plant returned XXX
To plant & machinery XXX By material at site XXX
To other expenses XXX By plant at site XXX
To P&L A/C XXX By contractee A/C
(conmtract price) XXX
By P&L A/C (if loss) XXX
 IF THE CONTRACT IS
INCOMPLETE
PARTICULAR AMOUNT PARTICULAR AMOUNT
To materials xxx By P&L a/c
To wages XXX (i) material lost XXX

To Plant& Machinery XXX (ii) plant lost XXX XXX

To other expenses XXX By plant /materiald returned XXX
To balance c/d (notional profit) XXX By plant at site XXX
By material at site xxx
By work in progess-
(i) work certified XXX
(ii) work uncertified XXX XXX
By p&l a/c (if loss) XXX

To P&L A/C XXX By balance b/d XXX

To work in progress a/c XXX
Q1. Show how you would deal with the materials in the ‘A’
contract account with the following information-
Materials recevied from the store room Rs. 40,000
Materials purchased directly Rs. 15,000
Materials returned to suppliers, not being according to
specification Rs 2,000
 Material received from ‘B’ contract Rs 6,000

 Material transferred to ‘C’ contract Rs. 3,000

 Materials returned to s`tores Rs 5,000

 Materials costing Rs 2,000 were stolen

 Materials worth Rs 1,200 were distroyed by fire and worth

Rs 300 were wasted in the process of work at the contract.

 Materials costing Rs 2,000 were sold for Rs 2,200

 Materials wasted in the work process were sold for Rs 100

only
 Materials in hand at the end Rs. 4,000
 PARTICULAR AMOUNT PARTICULAR AMOUNT
To material from stores 40,000 By material returned to
supplier 2,000
To materials purchased 15,000 By materials transferred to
‘C’ CONTRACT 3,000
To material transferred from ‘B’ contract 6,000 By material returned to
store 5,000
To P&L profit on material sold 200 `By P&L A/C-
(i)material stolen 2000
(ii)material destroyed by
fire 1200 3200
By material sold 2200
By material waste sold 100
By materials at the site A/C 4000
 WORK IN PROGESS
1. WORK CERTIFIED-The work completed on the contract
before the end of the accounting period is got certifed
by the contractor from the architect. This certificate is
known as architect certificate and work examined and
verified as ‘work certified’.
2. WORK UNCERTIFIED- A work done 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 or work uncertified’.
(i) If the value of certified work is less than 1/4 th of the
contract price-(Less than 25%)
(ii) If the certified work is 1/4th or more than 1/4th but
less than ½ of contract price-(Between 25% and
50%)
Profit = Cr.balance of contract account X 1/3 X cash
receivedl/work certified
(iii) If the value of certified work is ½ or more than ½ of
the contract price-( Between 50% and 90%) (2/3 of
the computed profit)
Profit=Cr. Balance of contract account X2/3 X cash
received/work certifed
 TREATMENT OF PLANT IN
CONTRACT ACCOUNT-
Q2. Show how you would deal with plant in x’contract
account with the following information:
In a plant was issued to contract on 1 st march costing Rs
60,000. Plant costing Rs. 3,000 was transferred to ‘B’
contract on 31st august. Plant costing Rs. 2000 was
stolen and another costing Rs.2000 was destroyed by
fire. The plant was insured against fire to full value. Plant
costing Rs.5000 was sold for Rs 4500. Plant at the end of
year was valued by charging depericiation 10%. p/a on
31st december
 ‘X’ contract Account

PARTICULAR AMOUNT PARTICULAR AMOUNT

 To Plant issued 60,000 By ‘B’ Contract A/C
Plant transferred-
Cost 3,000
less.. dep@10%
for 6 months 150 2850
P&L A/C( PLANT 2000
STOLEN)
Plant destroyed by fire 2000
Plant sold 4500
By P&LA/C-
Loss on plant sold
cost 5000
Less sold 4500 500

Plant at site(cost)48000
Less Dep.4000 44000