Notes on Contract Costing:

Features of Contract Costing6

1he following features are common to most contract costing system: a! 2igher proportion of direct costs:

;ecause of the self contained nature of most site operations, many items of indirect expenses can be identified specifically with a contract and, thus, can be charged directly. 4or example, telephones installed on site, site power usage, site vehicles, transportation design and planning salaries are charged directly to contract account.

$! ow indirect costs:

4or most contracts, the only item of indirect cost would be a charge for 9ead 0ffice expenses. This forms a very small portion of the total cost of contract

and is absorbed on some overall basis, such as a percentage of total contract cost.

c! Surplus Materials:

 #ll materials bought for a contract would be charged directly to the contract. #t the end of the contract, the contract account would be credited with the cost of  materials not used. If the materials are transferred to any other contract the new contract account is to be debited.

d! )ifficulties of Cost Control:

There exists fre)uently maor problems of cost control concerning materials usage and losses, pilferage, labour supervision and utilisation, damage to and loss of plant and tools etc. because of the scale of some contracts and the sie of the site.

e! Materials:

%aterials purchased or supplied from the stores shall be debited to contract account. %aterials returned to stores and amount received from sale of

materials will appear on the credit side. The accruing profit or loss being the difference between cost and sale price is transferred to (rofit J oss #ccount. Ahen the materials are transferred from one contract to another or from one site to another to avoid transportation, expenses in returning them to central stores and issuing them again, contract receiving the materials is debited with the cost of such materials and contract transferring the materials is credited. "ormal wastage of materials and store should be charged to the contract at a price at which they are priced out.

 #ll wor>ers employed at the contract site shall be treated as direct labour and, as such, wages paid to them should be debited to Contract #ccount.

g! Contract -lant:

-lant includes cranes, trucks, e"ca+ators, mi"ers and lorries% 1he usual ways in which cost of plant is dealt with are as follows:

A% When plant is purchased:

1he following two methods are in common use:

7i8 Charge new plant at cost to the contract. Ahen the plant is no longer

re)uired and is transferred to another contract, the original contract is credited with the depreciated value of the plant. In this way the contract bears the

charge of depreciation.

7ii8 Ahere plant is moved fre)uently from contract to contract, each contract is charged a daily or wee>ly rental.

#% When -lant is leased:

The leasing charges are charged directly to the contract. Note:

Ahatever method is followed, the ordinary running costs li>e fuel, repairs and insurance, would be charged direct to the Contract #ccount.

-rofit on Incomplete Contracts6

 # contract may ta>e more than one financial year for its completion. In such a case problem arises as to how much profit shall be credited to ( J  #Gc. It becomes necessary to compute profit on partly completed contract and ta>e credit for a part of it in the accounts at the year end.

The amount of profit that is to be credited to (rofit J oss #Gc depends upon the fact that how far the contract has advanced i.e. the stage of completion it has reached.

1he computation of profit is done in the following ways:

7i8 (rofit should be considered in respect of wor> certified only. Aor> uncertified should always be valued at cost.

7ii8 4or contract which has been ta>en ust in hand or which has not advanced far or G*th has been completed, no profit should be ta>en to the credit of

(rofit and oss #Gc. This is because it would be too early to forecast or estimate profit with a reasonable degree of accuracy.

7iii8 In case of a contract which is covered by #rchitectBs certificate, profit is computed by deducting the cost of contract from wor> certified. # portion of this notional profit is ta>en to new (rofit J oss #ccount and the balance of notional profit is carried forward as profit in suspense. Conventionally, G' or ? $G'rds of profit is credited to (rofit and oss #ccount.

If less than ?@ $ut more than B? of contract is completed then the portion of profit to $e taken to the credit of profit and loss account is computed as follows:

=D " Notional profit " Cash recei+ed E Work certified!

#ut, where more than ?@ $ut less than ? of contract is completed then -rofit is computed for taking to -rofit and oss Account:

B=D " Notional -rofit " Cash recei+ed E Work certified!%

7iv8 Ahere the contract is almost complete, an estimated total profit is ascertained by deducting the total cost and additional expenditure to be

incurred to complete the contract from the contract price. The (rofit and oss  #ccount should be credited with that proportion of total estimated profit on a

cash basis, which the wor> certified bears to the total contract price. 1he formula is as follows:

/stimated total profit " >alue of work certified E Contract price!:

7v8 If there is any loss, the total loss should be transferred to (rofit and oss  #ccount by crediting the Contract #ccount.

(rofit J oss #ccount -r. To Contract #ccount

1he Costing /ntries6

 # separate account will be maintained for each contract with the obect of finding out the overall (rofit or oss of the contract.