contract costing
TRANSCRIPT
CONTRACT
COSTING
COSTING
“The technique
and process of ascertaining costs.”
Contract
Costing
Batch Costin
g
Single Costin
g
Process
Costing
Job Costin
g
Operating
Costing
Multiple
Costing
Contract Costing is defined by the ICMA Terminology as
CONTRACT COSTING
that form of costing
which applies where work is undertaken to customer’s special requirements
and each order is of long duration.
The work is usually of constructional nature.
Each contract is treated as a cost unit. A separate account for each contract. Work is done at site, away from contractor’s own
premises. The contract has a long duration usually extending more
than one accounting year. All items of cost which are directly related to the contract
are chargeable to respective contract accounts. Payment is made by contractee on the basis of work
certified by surveyor or architect. Penalties or extra money may be imposed. Though contract costing is a part of Cost Accounting, but
it is purely based on the principles of Financial Accounting. Such as Dual Aspect, Prudence and Conservatism. And AS9 (Revenue Recognition)
FEATURES OF CONTRACT COSTING
• Fixed Price is agreed• Deductions are made for Defectives and Penalties• Extra money for additional work
Fixed Price Contract
• compensates for costs actually incurred by contractor.• a percentage of cost or any lump sum amount.
Cost Plus Contract
• Mixture of both of the above.• A fixed price will increase with increase in cost of material,
labour.
Contract with Escalation Cost
TYPES OF CONTRACT (IN COSTING)
Land Cost Site labour Cost Cost of material Depreciation on plant and equipments used at site Sub Contract Cost Cost of moving plant Cost of hiring Plant & Machinery Cost of design Maintenance Cost Guarantee & Warrantee Cost Penalties, etc.
COST ATTRIBUTABLE TO CONTRACT A/C
× General Administrative Cost× Selling Cost× Research & Development Cost× Depreciation on ideal plant & equipment× Cost of unconsumed material× Advance payment to sub contractor× Cost of material which is delivered to site for
future× Profit/Loss on sale of any material/plant
COST NOT ATTRIBUTABLE TO CONTRACT A/C
Can you Say how much work has been completed ???
Can you Say how much work has been completed ???
This is why an architect or surveyor is needed & invited and his certificate is obtained about how
much work has been completed.
New Building of Central Bank, Europe
“Work Certified is that proportion of the work completed which has been certified or and valued by the architect or surveyor.”
Payment is made on the basis of Work Certified.
“Work Uncertified is that part of the work completed which has not been certified/approved by the contractee’s architect or surveyor.”
There is no role of Work Uncertified in payment.
WORK CERTIFIED
WORK UNCERTIFIED
Accounting Treatment is same for both:Work-in-Progress A/c Dr.
To Contract A/c
01/04/2015 – 31/03/2016(ONE FINANCIAL YEAR)
01/04/20151.Starting of year 2. Starting
/continuation of contract
31/10/2015Assessment done by Architect or Surveyor and certified the
work done, i.e. work certified
31/03/20151.Ending of year2. Date of payment 3. Closing of
account of incomplete contract
Work Done and certifiedWork Done but not certified
WORKCERTIFIED
WORK UNCERTIFIE
D
A Contractor does not receive full payment of the Work Certified by the surveyor.
Contractee retains some amount to be paid, after sometime, when it is ensured that there is no fault in the work carried out by contractor.
This retained money is called as Retention Money.
RETENTION MONEY
Retention Money= Value of work Certified (-) Payment actually made
Particulars Amount
Particulars Amount
To Material Purchased XXX By Work-in-progress:Work CertifiedWork Uncertified
XXXXXX
To Material received from stores XXX
By Material Return to Stores XXX
To Material from other contract XXX
By Material sent to other contract XXX
To Wages XXX By COST of Material Sold
XXX
To Indirect Expenses XXX By Material on Hand XXXTo Plant & Machinery XXX By Plant on Hand XXXTo Accrued Wages XXXTo Accrued Expenses XXXTo Notional Profit c/d XXX
XXX XXX
SAMPLE OF CONTRACT A/C
Profit Distribution
(Contract Costing)
Completed Contract
If Profit,Transferred to Credit side of P&L Account
If Loss,Transferred to Debit side of P&L Account
Incomplete Contract
If Profit, 1 Part Transferred to
Credit side of P&L Account as per the work Completed
Another to WIP A/c
If Loss,Transferred to Debit side of P&L Account
As per the % of Work Completion, 3 stages of work completed is made which helps in transferring the amount to P&L Account.
PROFIT DISTRIBUTION IN INCOMPLETE CONTRACT
Stage Name % of Work Completion Formulae
Initial Stage 0% to 24% No Profit will be transferred to P&L
Work done but not Substantial 25% to 49%
Substantial Work Done 50% to 100%
LIABILITIES Amount
ASSETS Amount
Work in Progress:
XXX
Work Certified XXXCosting P&L Account
XXX(+)Work Uncertified XXX
Contractee A/cXXX
(-) Cash Received (XXX)
Unpaid ExpensesXXX
(-) WIP Reserve (XXX)
Unpaid WagesXXX
Plant in Hand(Less Depreciation) XXXMaterial on Hand XXXCash XXX
SAMPLE OF BALANCE SHEET (EXTRACT)
DON’T TRY TO TALLY …. !!!
