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Contract Costing: Contract: A contract is nothing but a big job having following features: 1.

A high price of thousands or lakhs of rupees. 2. The period taken for completion may be many months or even years. 3. The actual work may be done at a site away from the main office of the contractor. Contract Costing: Contract costing is the method of costing used to find out the cost and profit of each contract for a given period. Contract costing which applies where the work is undertaken to customers special requirement and order which is of a longer duration and which is carried out at site which is different from contractors premises. Contract costing enables the contractor to ascertain and control the cost of each job or contract. Contract costing is applicable when the work is usually of constructional nature for e.g. construction of road, building, dams, erection of factories, bridges, and other civil engineering works, the technique of contract costing is preferable. Meaning of some important terms under contract costing. 1. Contractor: Contractor is the person who undertakes the contract (job). 2. Contractee: Contractee is the person for whom contract job is undertaken. 3. Contract price: Contract price is the amount agreed to be paid by the contractee to the contractor as consideration for the job done. The contract price may be payable in lumpsum when work is completed. Alternatively, the amount may be paid in installments as the work progresses. The amount of each installment would depend on the amount of work done and certified by the architects.

4. Work Certified: In the case of large contract, normally the contractor receives on account payment against the value of the work completed at specific intervals. Work certified is that part of work completed for which the contractor gets the certificate of the architect. In the case of large contract, the contractor would expect the contractee to make a payments of the contract price in installments. He therefore, sends a part bill to the contractee as and when a portion of the work is completed. An architech, appoint in terms of the contract, between the contractor and contractee, scrutinizes the part bill, he certifies the work done for the purpose of payment. The work certified is related to the contract price and not to the cost of the work done. Suppose the contract price is Rs. 10 lacs, and the cost incurred to date by the contractor is Rs. 4 lacs. If half the work is done and certified, then the value of work certified will be half of Rs. 10 lacs, i.e. Rs. 5 lacs. The value will have nothing to do with cost-to-date of the work done. Therefore. Work Certified = Cost of Work Certified + Profit 5. Work Uncertified: Work uncertified is that cost of work done which relates to the period between the date of work certified and accounting year ending. At the end of the accounting period, not all work done would have been certified by the architect. This would be so because the bill itself would not have been submitted by the contractor. Suppose the accounting period ends on 31st December. The contractore would have submitted his bills which would probably include all expenses incurred by him upto 10th December and this might be certified for the payment by the architech. The expences incurred by the contractor between 11th December and 31st December is the cost of work uncertified, This amount is always with reference to its cost and not at contract price as compared to the work certified which is at selling price. 6. Retention Money: Retention money is that part of work certified which is retained by the contractee so as to safeguard his interest in case of future defects in the work done. The contractee does not pay full amount of the value of work certified.He keeps certain amount till contract is complete. This amount so kept is by contractee is called retention money.

How to find profits from incomplete contract: Performa of Contract Account Contract A/c For the year Particulars To Material Bought To Materials Issued From Stores Material transfer to other contract To Labour To Direct Expenses To Indirect Expenses To Depri. on Plant used To Notional Profit ended Rs. XX XX XX XX XX XX XX XX .. Particulars By Materials Lost (Cost) By Materials returned to stores By Materials Transf. to other contract By Closing stock of material By Work-in-progress Work Certified Work Unceritfied XX XX To Profit & loss A/C To Reserve For Contingency By Notional Profit Rs. XX XX XX XX XX XX XX

Question: How to determine the amount to be transferred to profit & loss account? Ans. 1) Find out the % of work completed 2) Find out the amount of profit to be transferred to profit & loss . account. 1) Find the extent of work certified: The value of work certified is to compared with the total contract price to ascertain . the % of the work completed. Thus, % of work Certified = Amount of work certified Total contract price X 100

The standard rules for transferring the amount of such profit to P & L A/c in relation to the extent of work completed. Extent or Work Completed: 0 to 24 % 25 % or more but less than 49 % 50 % or more 100 % i.e. when entire contract is complete. Profit to be Considered: N o profit is transferred to P&L a/c 1/3rd of notional profit transferred to P&L a/c & remaining in reserves 2/3rd of notional profit is transferred to P&L a/c & remaining in reserves. There is no need to keep ant reserve and the entire profit may be credited to the P&L A/c

Note: In any case, whenever there is a loss. It should be entirely debited to the profit and loss account irrespective of the stage of completion. This is in accordance with the basic convention of conservation followed by accountants. 2) Find amount of profit to be transferred to profit & loss account based on % of completion of work:
Profit to be transferred to P&L A/c= Notional Profit X 1 or 2 X Cash Received 3 3 Work Certified