TOPIC: CONTRACT

COSTING

PRESENTD BY G24:
186 KRRISH PARPIANI
187 NAMRATA PATEL
189 HEMANT PATIL
191 JEET POPAT
192 AAKANSHA PURSHOTTAMI
193 KHATRI MOHAMMAD RAFE RASHID
 WHAT IS CONTRACT COSTING?
 Contract costing is defined as that
form of specific order costing wherein
work is carried out in accordance with
customer’s special requirement and
each order is of long duration.
 Contract costing is generally applied
by contractors who undertake
constructional work and engineering
work like roads, dams, buildings,
canals, railway lines, bridges etc.
FEATURES OF CONTRACT COSTING
1. Contracts are generally of large size and, therefore, a
contractor usually carries out a small number of contracts
at a particular point of time.
2. A contract generally takes more than one year to complete,
3. Work on contracts is carried out at the site of contracts and
not in factory premises.
4. Each contract undertaken is treated as a cost unit.
5. A separate contract account is prepared for each contract
in the books of contractor to ascertain profit or loss on
each contract.
 IMPORTANT CONCEPTS
 Contractor: A person who undertakes the contract.
 Contractee: A person for whom the job is being undertaken.
 Contract Price: The amount which is to be paid by the contractee to the contractor, for
completing the contract work.
 Work Certified: It is an amount of work done by the contractor and certificated by the
architect as per the terms of contract.
 Work Uncertified: It is an amount of work completed by the contractor but not certified by the
architect at the end of the particular accounting year.
 Retention Money: It is an part of value of work certified by the architect which is a retained by
the contractee as a security.
 CONTRACT COSTING PROCEDURE
1. Contract Account: Each contract is allotted a distinct number and a sperate account is opened for each
contract
2. Direct costs: Most of the costs of contract are direct cost and are debited to contract account. Such
direct cost are material, labor, direct expenses, depreciation of plant and machinery etc.
3. Indirect costs: Any indirect expenses which are related to the particular contract is either paid or
outstanding are debited to the contract A/c. It induces head office expenses, general administrative
expenses etc.
4. Transfer of plant and material: When materials or plant are transferred from the contract, the
contract account is credited by the amount.
5. Contract price: The contact account is also credited with the contract price.
6. Work in Progress in Balance Sheet: At the end of the accounting year under incomplete contract
work in progress may be appear under Asset side of the Balance Sheet.
 PROFIT ON INCOMPLETE CONTRACT
There are two aspects of profit computation:
(a) Computation of notional profit or estimated profit.
(b) Computation of the portion of such profit to be transferred to Profit and Loss Account.
Notional Profit: Notional profit is the difference between the value of work-in-progress certified
and the cost of such work-in-progress certified.
Notional profit= value of work in progress certified- (cost of work to date- cost of cost of work not yet
certified)
Estimated profit: Estimated profit represents the excess of the contract price over the estimated
total cost of the contract.
Estimated profit= value of contract – Total estimated cost of contract completion
 PORTION OF NOTONAL PROFIT OR ESTIMATED PROFIT TO
BE TRANSFERRED TO PROFIT AND LOSS ACCOUNT
1. If the contract is complete up to 25% - then profit & loss a/c is nil. It means there is no need to transfer
any profit from notional profit to profit & loss a/c. The entire amount of notional profit is transferred to
work in progress (profit reserve).
2. If the contract is completed between 25% to 50% - Then the profit & loss is calculated as –

3. If the contract is completed between 50% to 90% - then the profit & loss a/c is calculated as,

4. Nearing Completion - If the contract is completed between 90% to 99% then profit & loss a/c is
calculated as,
x