Paper 3A: Cost Accounting Chapter 6 CA. Dharmendra Gupta, FCA

1 • Meaning & Features

2 • Costs & Expenses

3 • Work Certified & Work uncertified

4 • Treatment of Plant & Machineries

5 • Notional Profit & Its Recognition

6 • Format of Contract A/C & Balance Sheet

7 • Escalation Clause

8 • Estimated Total Profit & Recognition of Profit

Also called Terminal Costing

Usually adopted by Building Contractors

Large Job/ Assignment / Work order

Takes 2 or more Financial Years

Treatment of profit of Incomplete Contract

Fixed Price Contract Vs Cost Plus Contract

Applicable in Construction, Ship Building etc

Work at Site of Contract

Direct Expenses

Indirect Expenses

Separate Account

Number of Contracts

Cost Centre and Cost Unit

Two parties i.e. Contractor and Contractee

Recognition of Profit

Material

Labour

Direct expenses

Indirect Expenses

Sub-contract Costs

Cost of Extra work

Depreciation of Plant

Value of Work certified • Valued at Contract Price • Based on Technical Evaluation • Not based on Cost • May Include Profit or Loss

Cost of Work uncertified • Cost Basis • Work not Certified, or • Completed after Certification

Method I • Plant Shown In Debit Side at Cost • Plant Shown In Credit Side at WDV • Net Effect Being Depreciation • Applicable when Plant Used For Whole Year

Method II • Only Depreciation In Debit Side • Applicable When Plant used For Part of the year

Notional Profit • Excess of Credit Side on Debit Side

Notional Loss • Excess of Debit Side on Credit Side

Notional Loss • Taken to Profit & Loss A/C Fully Irrespective of Stage of

Completion

Share of Notional Profit taken to P & L A/C • Work Certified Less Than 25%

• No Share of Profit is Recognized in P & L A/C • Work Certified Less Than 50%

• 1/3 X Notional Profit X Cash Received/Work Certified • Work Certified More Than 50%-99%

• 2/3 X Notional Profit X Cash Received/Work Certified • Work Certified 100%

• Notional profit X Cash Received/Work Certified

Applicable in Fixed Price contract

Related To Increase in Prices Of Material, Labour etc

Contactee may agree to Share an Agreed Portion of The Excess Increase over a Specified Limit

Accounting Treatment

• Contractee Account Dr. • To Contract Account

Find the amount to be debited to Contractee? • A Contract has a clause if Material price increases by more than 2%, the

Contractee will Share 40% of the increase over 2%. • It was agreed that material price has increased by 10%. • Total Material consumed is Rs. 55000.

Solution • Price of material before increase = • Rs.55000/110% = Rs.50000 • 2% of 50000 = Rs. 1000 • Increase in the cost of material Rs. 5000 • Increase In excess of 2% = Rs. 5000 – 1000 = Rs. 4000 • Contractee’s Share = 40% of Rs. 4000 = Rs. 1600 • Contactee’s A/C will be debited & Contract A/C be credited

Supply From Stores

Direct Purchase

Tool Making Materials

Supply By Contractee

Transfer of material

Return of Excess Materials to stores

Sale of Surplus Material

Abnormal Loss of Materials

Estimated Total Costs (ETC) • Total Costs Till Date + Estimated Costs

To Complete The Contract

Estimated Total Profit (ETP) • Contract Price – Estimated Total Costs

Estimated Total Profit x Work Certified/contract Price

Estimated Total Profit x Work Certified/contract Price x cash Received/Work Certified

Estimated Total Profit x Cost till date/ Estimated Total Cost

Estimated Total Profit x Cost till date/ Estimated Total Cost x cash Received/Work Certified

Notional Profit x Work Certified/contract Price

2/3 x Notional Profit x Cash Received/ Work certified

Estimate the Share of Notional Profit to be taken to P & L A/c

• Total Costs Till Date Rs 9000 • Estimated Costs To Complete The Contract Rs. 575 • Notional Profit Rs.2800 • Work certified Rs. 11000 • Contract Price Rs. 12000 • Cash Payment Ratio 90%

Working Notes • Estimated Total Cost (ETC) =

• Rs. 9000+575= Rs. 9575 • Estimated Total Profit (ETP) =

• Rs. 12000 – 9575 =Rs. 2425

The Share of Notional Profit to be taken to P & L A/C will be Minimum of

1.Estimated Total Profit x Work Certified/contract Price

• Rs.2425 X 11000 /12000= Rs.2223

2.Estimated Total Profit x Work Certified/contract Price x cash Received/Work Certified

• Rs. 2425 X 11000 /12000 X 90 %= Rs.2000

3.Estimated Total Profit x Cost till date/ Estimated Total Cost

• Rs. 2425 X 9000 /9575 =Rs. 2279

4.Estimated Total Profit x Cost till date/ Estimated Total Cost x cash Received/Work Certified

• Rs. 2425 X9000 / 9575 X 90% = Rs. 2051

5.Notional Profit x Work Certified/contract Price

• Rs. 2800 X 11000/ 12000

6. 2/3 x Notional Profit x Cash Received/ Work certified

• 2/3 X2800 X90% = Rs.1680

Since Rs. 1680 is minimum, it should be taken to P & L A/C on Prudence Basis

Contract A/C Particulars Rs. Particulars Rs. To Materials To Wages To Direct Expenses To Indirect Expenses To Sub Contract work To Cost of Extra Work To Plant ( at Cost) To Notional Profit (Balancing Figure)

By Work in Progress Work Certified Work Uncertified By Balance c/d Plant (WDV) at site Material at Site

To Profit & Loss A/C (Profit recognized) To Reserve Profit (Balancing Figure)

By Notional Profit b/d

Contract A/c Particulars Rs. Particulars Rs. To Work in Progress b/d Work Certified Work Uncertified To Balance b/d Plant at site material at site

By Reserve Profit

Liabilities Rs. Assets Rs. CURRENT ASSETS: Contract Work-in-Progress Value of work certified Add: Cost of Work Uncertified Add: WDV of Plant at Site Add: Cost of Materials at Site Sub-Total Less: Reserve Profit Net Balance Less: balance in Contractee’s Personal A/c (Cash Received) Net Value Of Contract Work In Progress

} The following details relate to a Contract. } Contract Price Rs.7500 } Payment Ratio 90% } Particulars

Rs.

} Materials 900 } Labour 850 } Direct Expenses 35 } Indirect Expenses 15 } Work Certified to date 1750 } Work uncertified nil } Plant Issued 100 } WDV of Plant 80 } Prepare a Contract A/C and Show WIP in Balance Sheet

Stage of Work certified= • Work Certified / Contract Price • 1750/7500 • 23.33%

Since % of Completion is less than 25% • No Share of Notional Profit To Be Recognised

Loss in any Contract A/C is taken to P & L A/C

Contract A/C For the year ended….

Particulars Rs. Particulars Rs. To Materials To Wages To Direct Expenses To Indirect Expenses To Sub Contract work To Cost of Extra Work To Plant ( at Cost)

900 850 35 15

100

By Work in Progress Work Certified Work Uncertified By Balance c/d Plant (WDV) at site Material at Site By Loss ( balancing figure)

1750

80

70

1900 1900 By Loss b/d 70 To Profit & Loss A/C

70

70 70

} The following details relate to a Contract. } Contract Price Rs. 7500 } Payment Ratio 90% } Particulars Rs. } Materials 1100 } Labour 1150 } Direct Expenses 125 } Indirect Expenses 20 } Work Certified b/d 1750 } Work Certified c/d 5650 } Work uncertified c/d 100 } Plant 80 } WDV of Plant 50 } Prepare a Contract A/C and Show WIP in Balance Sheet

Stage of Work certified= • Work Certified / Contract Price • 5650/7500 • 75.33%

Since % of Completion is more than 50% • Share of Notional Profit To Be Recognised • 2/3 x Notional Profit x Cash Received/ Work certified • 2/3 X 1575 X 90% • Rs. 945

Contract A/C For the year ended….

Particulars Rs. Particulars Rs. To Work in Progress b/d Work Certified To Balance b/d Plant at site To Materials To Wages To Direct Expenses To Indirect Expenses To Notional Profit (Balancing Figure)

1750

80

1100 1150 125

20 1575

By Work in Progress Work Certified Work Uncertified By Balance c/d Plant (WDV) at site

5650

100

50

5800 5800 To Profit & Loss A/C To Reserve Profit

945 630

By Notional Profit b/d 1575

1575 1575

Balance Sheet Liabilities Rs

. Assets Rs.

CURRENT ASSETS: Contract Work-in-Progress Value of work certified Add: Cost of Work Uncertified Add: WDV of Plant at Site Add: Cost of Materials at Site Sub-Total Less: Reserve Profit Net Balance Less: balance in Contractee’s Personal A/c (Cash Received=90%of work certified) Net Value Of Contract Work In Progress

5650 100

50 ____ 5800 (630) 5170

(5085)

85

} The following details relate to a Contract. } Contract Price Rs. 7,500 } Payment Ratio 90% } Particulars Rs. } Materials 630 } Labour 850 } Direct Expenses 45 } Reserve profit b/d 630 } Work Certified b/d 5,650 } Work Certified c/d 7,500 } Work uncertified b/d 100 } Plant b/d 50 } WDV of Plant 20 } Prepare a Contract A/C and Show WIP in Balance Sheet

Stage of Work certified= • Work Certified / Contract Price • 7500/7500 • 100%

Since % of Completion 100% • Share of Notional Profit To Be Recognised • Notional Profit x Cash Received/ Work certified • 825x 90% • Rs. 742.5 • Contractee A/C is Debited in Contract A/C

Contract A/C For the year ended….

Particulars Rs. Particulars Rs. To Work in Progress b/d Work Certified Work Uncertified To Balance b/d Plant at site To Materials To Wages To Direct Expenses To Indirect Expenses To Notional Profit (Balancing Figure)

5650

100

50 630 850

45 -

825

By Reserve Profit By Contractee A/C By Balance c/d Plant (WDV) at site

630 7500

20

8150 8150 To Profit & Loss A/C To Reserve Profit

742.5 82.5

By Notional Profit b/d 825

825 825

Cost of The Project Rs. 1049000

Work Completed 2/3

Work Certified 50%

Find The Cost of Work Uncertified?

Since cost of Completing 2/3 Contact = • Rs. 1049000

So Cost of Completing The Whole Work = • Rs. 1049000/(2/3) • Rs. 1573500

Extent of Work uncertified = • 2/3-1/2=1/6

Then Cost of Work uncertified = • 1573500X(1/6) = Rs. 262250

1 • In our Discussion, We have discussed

2 • What is Contract and Types of Contracts

3 • Various Items of Income & Expenditure

4 • Format of Contract A/C in First & Next Year

5 • Balance Sheet representation of WIP

6 • Cost of Work Uncertified

7 • Recognition of Notional Profit and Loss

8 • Escalation Clause

9 • Concept of Estimated Total Profit

1 • What do you mean by contrast costing

2 • What are features of contrast costing

3 • Difference between Job & Contract Costing

4 • What is Cost plus and Fixed price contact

5 • What is the meaning of Escalation clause

6 • What is notional profit and Reserve Profit

7 • What is Estimated Total Profit

8 • What is Estimated Total Cost

9 • How Depreciation on Plant is recorded