ASSIGNMENT ON CONTRACT COSTING

1. CONTRACT COSTING
SUBMITTED BY :-
 AMARNATH KUMAR
 474
 SEC –B
 SHAHEED BHAGAT SINGH
COLLEGE(DU)
SUBMITTED TO :-
MR ASHWANI SIR

3. Definition:
ICMA defines, "Contract costing
is that form of specific order
costing which applies where work
is undertaken to customer's
special requirements and each
order is of long-term duration.“
Contract costing is applicable in:
Building construction
Road construction
Bridge construction
Ship building, etc….

4.  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.
6. Nearly all labor cost will be direct.
7. Most expenses (e.g. electricity, telephone, insurance, etc.) are also
direct

5. Concepts relating to Contract Accounts:
• Contractor:Person who undertakes the
task of doing the job.
• Contractee:Person on whose behalf the
task is being done.
• Contract Price:Value for which the
contract is undertaken.
• Work certified:Part of the total contract
price which is has been completed and
approved by the architect.

6.  Concepts relating….
• Uncertified Work: Part of the task
done but not approved by the
architect of the Contractee.
• Cash Paid: Part of the work certified
that is paid by the Contractee .
• Retention Money: Part of the work
certified that is held back by the
Contractee.

7.  Contract Costing Procedure:
• Contract Account: Each contract is allotted a
distinct number and a separate account is opened
for each contract.
• Direct costs: Most of the costs of a contract are
direct cost and are debited to the contract
account. Such direct costs are- 1. Materials, 2.
Labour and supervision, 3. Direct expenses, 4.
Depreciation of plant and machinery,
5. Subcontract costs, etc.
• Indirect costs: Contract account is also debited
with overheads which tend to be small in relation
to direct costs.

8. • Transfers of materials or plant: When materials,
plant or other items are transferred from the
contract, the contract account is credited by the
amount.
• Contract price: The contract account is also
credited with the contract price.
• Profit or loss on contract: The balance of
contract account represents profit or loss which is
transferred to Profit and Loss Account. However,
when contract is not completed within the
financial year, only a part of the profit is taken
into account and the remaining profit is kept as

9.  Types of contracts:
There are three types of contract which are mentioned below:
• Fixed price contract: The contract that is
executed with the fixed price which is agreed by
the contractor and the contractee is called the
fixed price contract.
• Fixed price contract with escalation and de-
escalation clauses: Escalation clause is often
provided in contracts to cover any likely changes in
the price or utilization of materials and labour. An
escalation clause safeguards the interest of the
contractor by upward revision of the contract
price, a de-escalation clause may be interested to
look after the interest of the contractee by

10. TYPES OF CONTRACT……..
3. Cost-Plus Contracts: The contract in
which the contract price is determined by
adding a certain percentage of profit on
cost is known as cost plus contract. The
cost plus contract is adopted to overcome
with problem of fixing the contract price
caused due to nature of contract, duration
of completion of contract, uncertainty of
material, change in the price level, new
technology etc. This type of contract is
mostly followed by the government for
production of special articles not usually

11. PROFIT ON INCOMPLETE CONTRACTS
There are two aspects of profit computation. They
are
1. Computation of notional profit or estimated
profit.
2. Computation of the portion of such profit to be
transferred to Profit & Loss Account.
 Notional Profit:
Difference between the value of WIP certified and
the value of WIP not certified. It is computed as
follows
Value of work certified
10,00,000
Add: Cost of work not yet certified

12.  Estimated Profit: Excess of the contract price
over the estimated total cost of the contract.
It is computed as follows
Contract Price 15,00,000
Less: Total cost already incurred
11,00,000
4,00,000
Less: Estimated additional cost
required to complete the contract
1,00,000
Estimated Profit 3,00,000

13. Portion of Notional Profit or Estimated Profit to be transferred to Profit &
Loss Account
There are some generally followed rules.
They are –
(a) When work certified is less than 25%
complete No profit or Loss be
accounted for
(b) When work certified is 25 % or more
but less than 50%
Notional Profit 1/3 Cash received

14. (C). When work certified is the 50% or more but
less than 90%
National profit 2/3 cash received
work certified
(d) When the contractor estimates the profit:
Estimited profit work
certified
contract

16. SOLUTION

17. SOLUTION