Contract Costing

Definition of Contract
Contract costing is a variant of job costing.
Contract costing is also a form of specific order
costing.
Contract costing is also known as terminal costing.
According to walter w . Big
Contract or terminal costing is the term applied to the
system adopted by those business which carry out
substantial building or constructional contracts.
Features of contract costing
Contract is generally large size.
A contract generally takes more than one year to
complete.
Each contract undertaken is treated as a cost unit.
All labourers are treated as direct labourers.
Most exp.(electricity , telephone , insurance) are also
direct in nature.
There is no heavy investment on assets initially in the
case of contract costing.
Objective of contract costing
To ascertain the cost of each contract separately.
To ascertain the profit or loss on each contract
separately.
To facilitate control of cost of each contract.
Parties of contract
1- contractor :- The contractor is the person who
undertakes to do the contraction work.

2- contractee:- The contractee is the person for whom

the contract work is done.
Debit items of contract account
Materials
Direct wages
Direct expenses
Indirect expenses
Plant and machinery and depreciation
Profit on sale of plant
Sub contract cost
Expenses of extra cost
Profit on sale of material
Provision for cotingencies
Opening value of W.I.P.
 Credit item of contract account
When contract is incomplete
 1- work in progress
2- value of work certified
3- work uncertified
4- Plant at site
5- material return to stores
6- material return to the supplier
7- sale of materials
8- material transferred to other contract
9- loss on sale of plant
10- plant lost in accident.
11- loss on sale of plant and machinery
When contract is completed
Contract price
Balance of material
Return of material
Material transferred
Sale of materials
Return of plant and machinery
Loss on damages of materials and plant
Escalation clause
Escalation clause is clause in the agreement between
the contractor and contractee which provides for an
upward revision of contract price. In the event of the
cost the contract going beyond a certain level on
account of rise in the prices of material and labour.

This clause is generally included in long period

contracts.
De – escalation clause
The de-escalation clause provides for downward
revision of the contract price in the event of the cost of
the contract going below a certain level on account of
fall in price of material and labours.
The de-escalation clause safeguards the interest of the
contractee by providing a downward revision of the
contract price.
Computation of profit and loss on
contract
Profit on completed contracts
Profit on uncompleted contracts
Profit on likely to be completed contract
 Profit on Uncompleted Contracts
When work certified is less than ¼ of the contract

no profit is transferred to profit and loss

When work certified is more than ¼ but less than ½

of the contract

Profit and loss= notional profit × 1/3 × cash received

work certified
When work certified is more than 1/2 but less than 9/10
of the contract

Profit and loss= notional profit × 2/3 × cash received

work certified

When contract is near completion then the estimated

profit should be calculated on the whole contract.

Profit and loss= estimated profit × work certified

Contract Price
 SPECIMEN OF INCOMPLETE CONTRACT
CONTRACT ACCOUNT
CONTRACT A/C NO. …………..
(FOR THE YEAR ENDED………………..)
PARTICULAR AMOUNT PARTICULAR AMOUNT
To Opening Work In Progress By W.I.P. :-
To Material Issue Work Certified
To Material Purchases Work Uncertified
To Material Transferred From By Material At Site
Other Contract By Plant At Site (At Cost)
To Store Consumed By Material Return
To Depreciation On Assets By Sale Of Material
To Direct Wages By Profit & Loss:-
To Direct Exp. Loss On Sale Of Material
To Profit On Material Loss On Plant
To Balance C/D By Material Transfer To Other
Contract

To Profit And Loss By Balance B/D

To Work In Progress
JOB COSTING
Job costing as A distinctive method costing is A form of
specific order costing which is adopted to execute the work
strictly according to customer’s specification. The
production process depends upon the member of order
received from customers.
FEATURES OF JOB COSTING
Job costing is adopted by manufacturing concerns as
well as non manufacturing concern .
Those concern which follow job costing method,
produce goods not for stock but against specific order
from customers.
Job costing adopted where the work done is analysed
into different job each job being considered a separate
unit of cost.
The cost of each job is ascertained after the
completion of the job.
As each job is different from other job, each job needs
separate treatment under job costing.
By comparing the actual cost of each job against the
price charged foe each job, the profit or loss made on
each job is ascertained.
Under this method the cost of each job and the profit
or loss made on each job undertaken is found out
separately.
Under this method, production is intermittent and
not continuous.
The industries need not incur selling and distribution
expenses as the customers themselves come to place
order and collect the goods after production.
Objective of job costing
To ascertain the cost as well as the profit or loss on each
job.
To find out those jobs which are more profitable and those
which are not profitable or less profitable.
Control of cost (By comparing actual cost with estimated
costs) is also one of the objective of job costing.
Job costing is also intended to indicate the estimation is
incorrect or the actual cost is excessive.
Job costing is to provide a basis for estimating or
determining the cost of similar jobs undertaken in future.
Difference between job costing and contract
costing
 Definition
 Job costing is the ascertaining of costs that are incurred in the undertaking of a specific job. On the
other hand, contract costing is the ascertaining of costs associated with the production of a specific
product as per the contract agreement with the customer.
 Suitable industry
Job costing is suitable for the manufacture of products under the customer’s specifications. On the
other hand, contract costing is suitable for construction works.
 Costing period
Job costing involves the ascertaining of costs after the job is completed. On the other hand, costs are
ascertained as the project is carried out.
 Work location
While the production of a product under job costing is done within the company’s premises, the
construction or production involving contract costing takes place at customer’s preferred site.
 Scale of work
While job costing involves a few products, contract costing involves significantly large scale
projects.
Value of work
The value of work involved in job costing is less. On the
other hand, the value of work involved in contract
costing is more.
Payments
Jobs carried under job costing are paid upon
completion or full with order. On the other hand, jobs
under contract costing are paid in installments since the
value and costs are high.
Sub-contracting
Sub-contractors are not engaged in work under job
costing. On the other hand, part of the work may be
delegated to a sub-contractor.