Costing Methods & Techniques IV Semester B.

Com

Chapter-1
Job Costing and Contract costing

Meaning of Job Costing:

The term Job Costing is defined as, “in job costing costs are collected and accumulated
according to the jobs, contracts, products or work orders, each job is treated as a separate entity
for the purpose of costing, the material and labour costs are complied through the respective
abstracts and overhead area charged on predetermined basis to arrive at the total cost”.

Features of Job costing:

1. Cost of each job is ascertained separately.
2. Job is accepted only against customer’s orders but not against the stock.
3. Each order is an independent.
4. Each job is required special attention because of each job has its own characteristics.
5. Flow of production from one department to another is not uniform.
6. Each order is given a separate job number for cost accounting purpose.
7. Duration for completing each job is very less.

Advantages of Job Costing

1. It helps management in identifying profitable and unprofitable jobs.
2. 2. It provides required information for preparation of estimates while submitting
quotations for similar jobs.
3. It facilitates effective cost control by evaluating operational efficiency of each job.
4. It helps the management to fix the selling price for each job on the basis of past
experience.
5. Spoilage and defective work can be easily identified with each job.
6. It facilitates the introduction of budgetary control of overheads, since the overheads are
charged on predetermined basis to arrive at the total cost.

Disadvantages of Job Costing

1. This method relatively involves more labor intensive.
2. It is very expenses.
3. Because of more clerical work, there is a possibility of committing more errors.
4. It is basically historical costing. It does not provide for the control of cost unless it is
combined with estimated or standard costing system.
5. It is difficult to make cost comparison among different jobs because each job has its own
features.

Ms. Annapoorna. M., Associate Professor, Department of Commerce & Management, Seshadripuram
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Costing Methods & Techniques IV Semester B.Com

Contract Costing

Meaning of Contract Costing:

Contract costing is that form of specific order costing which applies where the work is
undertaken to customer’s requirements and each order is of long duration as compared to job
costing.

Contract costing is also known as “terminal cost”, because it relates to a contract or work
undertaken for a specific, and is definitely terminable on the completion of the contract.

Features of Contract costing

 Contract costing is a variant of job costing. So, the principles of job costing are
applicable to contract costing.
 Contracts are generally of large size and therefore, a contractor usually carries out a small
number of contracts at a particular point of time.
 It takes more than one year to complete.
 Work on contract is carried out at the site of contracts and not in factory premises.
 A separate contact a/c is prepared for each contract in the books of contractor to ascertain
profit or loss on each contract.
 Most of the materials are specially purchased for each contract. These will, therefore, be
charged direct from the supplier’s invoices. Any materials drawn from the store are
charged to contract on the basis of material requisition notes.
 All the labour cost will be direct.
 Most of the expense like electricity, telephone, insurance etc, is also direct.
 Specialist sub-contractors may be employed for electrical fittings, welding work, glass
work etc.
 Plant and equipment may be purchased for the contract or may be hired for the duration
of the contract.
 Payments by the customer (contractee) are made at various stages of completion of the
contract based on the architect’s certificate for the completed stage.
 Penalties may be incurred by the contractor for failing to complete the work within the
agreed period.

Difference between Job costing and Contract costing

Basis Job costing Contract costing

1. Size Small in size. Large/big in size.
2. Place of Work is performed in the Contract is executed at site.
work workshop of the proprietor.
It takes less time for Contract takes more than one financial
3. Time for completion. year.
completion The selling price of a job is The price is paid in various installments

Ms. Annapoorna. M., Associate Professor, Department of Commerce & Management, Seshadripuram
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Costing Methods & Techniques IV Semester B.Com

4. Payment of paid in full after completing depending upon the progress of the work.
price. job.

Heavy investment on assets Less investment compared to job.

5. Investments initially.
Expenses may be direct and Most of the expenses are direct in nature.
6. Nature of indirect. In case of incomplete contract, only
expenses. Profit earned entirely taken proportionate of profit is transferred to
7. Transfer of to p&l a/c p&l a/c depending on the completion of
profit. the stage of contract.

Parties of the Contract

1. Contractor
2. Contractee

Types of contract:

1. Fixed price contracts

Under the fixed price contract, the contractee agrees to pay the contractor a fixed contract
price
agreed upon.

2. Fixed price subject to Escalation clause

Under the fixed price subject to escalation clause (i.e. changes in prices, increase in price) the
contractee agreed to pay the contractor not only the fixed contract price agreed upon, but also
the
escalation (increase in price) in the cost of the contract.

3. Cost plus contract

A contract whose contract price is not agreed upon in advance, but is to be determined later,
i.e.
after the construction work is over, by adding to the actual cost of the contract a fixed
percentage
of profit on the cost of the contract is called cost plus contract.
Example: construction of dams, power house, newly designed ship etc., Government often
prefers
“Cost plus” terms.

Contract costing Procedure

1. Contract a/c is opened separately for each contract a/c and distinct number is allotted.
2. Direct costs: It includes most of the cost like:-
I) Cost of materials: Materials purchased and materials issued from stores are debited to
contract.
II) Materials returned to stores are credited to contract a/c.
III) Materials at site (at end of each accounting period value of materials lying unused at site)
are
Ms. Annapoorna. M., Associate Professor, Department of Commerce & Management, Seshadripuram
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Costing Methods & Techniques IV Semester B.Com

credited to contract a/c.

IV) cost of labour are debited
V) Plant
 Cost of plant installed- Dr
 The value of the plant at the end of the accounting period is revalued and Cr to contract
a/c.
 Plant sold on completion of the contract- the sale proceeds are credited to contract a/c.
 Amount of depreciation is
VI) Sub-contract costs are Dr (painting, welding etc)

3. Payment based on Architect’s certificate:

In large contract’s, when the contract takes more than one financial year then the parties to the
contract i.e. contractor and contractee may agree for the system of progress payments.
In this system part, payments of the contract amount are paid from time to time on the basis of
certificate issued by the architects certifying the value of the work completed.
Such payments are credited to the personal a/c of the contractee.

Work-in-Progress
When contract is not completed till the end of the accounting year, the architect is required to
the
value the work-in-progress, such work-in-progress is classified in to the following:
I) Work certified: The value of the work certified, stated in the architect’s certificate, is called as
work
certified.

II) Work uncertified: The is that part of the work-in-progress which is not approved by the
engineer/architect and it does not include on element of profit.
Both work certified and uncertified are entered in (appear) credit side of contract a/c
and in asset side of the balance sheet.

Retention money and Cash ratio:

Cash ratio:
The contractee in usual practice will not pay the full amount of work certified. He may pay a
fixed
percentage say 80%, 90% of the work certified depending upon the terms of the contract. This
is
known as cash ratio.

Retention money:
The portion of the amount of work certified retained by the contractee is called the retention
money.
It acts as a type of security for any defective work which may be found in the contract later on.

Notional Profit:
It is the difference between the value of work certified and the cost of such work-in-progress
certified.
Ms. Annapoorna. M., Associate Professor, Department of Commerce & Management, Seshadripuram
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Costing Methods & Techniques IV Semester B.Com

Proforma of Contract a/c

Particulars Amoun Particulars Amount

t (Rs) (Rs)
To Materials By Materials: In hand c/d
In hand/Directly XXX At the end of the year/returned to
Purchased/issued from stores. XXX
stores/from other contract ByPlant/tools/Equipment
(at the beginning) At the end of the year c/d
To Direct wages Returned to stores.
To Direct Expenses By P/L a/c
To Plant/tools/equipment (Any loss connected to material
In hand or site or directly and plant) XXX
purchased/received from stores/ By work-in-progress c/d
transfer from other contracts (at Work certified XXX
beginning) Work uncertified XXX
To sub-contract cost XXX
To Notional profit c/d XXX
(Bal-fig)
XXX XXX
To Profit and loss a/c XXX
(profit transferred to P/L a/c) By Net profit b/d XXX
To work-in-progress a/c
(Profit held in reserve) XXX

Problems

1. The following expenditure was incurred on a contract of Rs. 12,00,000 for the year ending 31-
12-2007
Materials 2,40,000
Wages 3,28,000
Plant 40,000
Overheads 17,200
cash received on account of the contract at 31 st Dec. 2007 was Rs 4,80,000, being 80% of the
work
certified. The value of materials in hand was Rs. 20,000. The plant had undergone 20%
depreciation.
Prepare Contract Account.

Ms. Annapoorna. M., Associate Professor, Department of Commerce & Management, Seshadripuram
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Costing Methods & Techniques IV Semester B.Com

2. The XYZ construction Company undertakes large contracts. The following particulars relate
to
contract No. 125 carried out during the year ended on 31st march, 2006.
Rs
Rs
Work certified by architect 1,43,000 Wages accrued on 31 st March 2006
1,800 Cost of work not certified 3,400 Direct expenditure
2,400 Plant installed at site 11,300 Materials on hand on 31 st March 2006
st
1,400 value of plant on 31 March 2006 8,200 Materials returned to
store 400 Materials sent to site 64,500
Direct expenditure accrued on 31st march 2006 200 Labour
54,800 Contract price 2,00,000 Establishment charge
3,250 Cash received from contractee 1,30,000 Prepare a Contract Account
for the period ending 31st march 2006 and find out the profit. It was decided to transfer 2/3 of the
profit on cash basis to profit and loss Account.

3. The Indian Construction Co. Ltd. has undertaken the construction of a bridge over the River
Yamuna
for a corporation. The value of the contract is Rs. 15,00,000 subject to retention of 20% until
one year
after certified completion of the contract, and final approval of the corporation’s engineer.
The following are the details as shown in the books on 30th June, 2006.
Rs
Rs
Labour on site 4,05,000 Materials on hand on June 30th 2006 6,300
Materials direct to site 4,20,000 Wages accrued on June 30th 2006 7,800
Materials from stores 81,200 Direct expenses accrued on June 30th 2006 1,600
Hire and use of plant 12,100 Works not yet certified at cost 16,500
Direct expenses 23,000 Amount certified by the corporation’s
General overhead allocated engineer
11,00,000
to the contract 37,100 Cash received on account 8,80,00
Prepare Contract account, Contractee’s account, and show how it would appear in the Balance
sheet.

4. Modern Contractors have undertaken the following two contracts on 1st January 2005
Contract A(Rs) Contract B(Rs)

Materials sent to sites 85,349 73,267

Labour engaged on sites 74,375 68,523
Plants installed at sites at cost 15,000 12,500
Direct expenditure 3,167 2,859
Establishment charges 4,126 3,852
Materials returned to store 549 632
Work certified 1,95,000 1,45,000
Cost of work not certified 4,500 3,000
Ms. Annapoorna. M., Associate Professor, Department of Commerce & Management, Seshadripuram
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Costing Methods & Techniques IV Semester B.Com

Materials in hand 31st Dec 2005 1,883 1,736

Wages accrued 31st Dec 2005 2,400 2,100
st
Direct expenditure accrued 31 Dec 2005 240 180
Value on plant 31st Dec 2005 11,000 9,500
The contract prices have been agreed at Rs. 2,50,000 for contract A and Rs. 2,00,000 for
contract B.
Cash has been received from the contractees as follows: Contract A Rs. 1,80,000 and Contract
B Rs.
1,40,000.
Prepare contract Accounts, Contractees Accounts and show how the work-in-progress shall
appear in
the Balance sheet of the contractor.

5. T.K Construction Ltd. is engaged on two contracts A and B during the year. The following
particulars
are obtained at the year end (Dec. 31):
Date of commencement Contract A- April 1 Contract B-
September 1
Contract price 6,00,000 5,00,000
Materials issued 1,60,000 60,000
Materials returned 4,000 2,000
Materials on site (Dec 31st) 22,000 8,000
Direct labour 1,50,000 42,000
Direct expenses 66,000 35,000
Establishment expenses 25,000 7,000
Plant installed at cost 80,000 70,000
Value of plant (Dec. 31st) 65,000 64,000
Cost of contract not yet certified 23,000 10,000
Value of contract certified 4,20,000 1,35,000
Cash received from contractees 3,78,000 1,25,000
Architect’s fees 2,000 1,000
During the period, materials amounting to Rs. 9,000 have been transferred from contract A to
contract B. You are required to show: (a) Contract Accounts (b) Contractees’ Accounts and
(c) Extracts from Balance sheet as on December 31st, clearly showing the calculation of
work-in-progress.

6. Elite Ltd. was engaged on one contract during the year 2005. The contract price was Rs.
2,00,000.
The trial balance extracted from the books on 31st December 2005 stood as follows:
Rs. Rs.
Share capital - 40,000
Sundry creditors - 4,000
Building 17,000 -
Cash at bank 4,500 -
Contract account:
Material 37,500 -
Ms. Annapoorna. M., Associate Professor, Department of Commerce & Management, Seshadripuram
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Costing Methods & Techniques IV Semester B.Com

Plant 10,000 -
Wages 52,500 -
Cash received from contractee - 80,000
(80% of certified work)
Expenses 2,500 -

TOTAL 1,24,000 1,24,000

Of the plant and materials charged to the contract, plant costing Rs. 1,500 and materials costing
Rs. 1,200 were destroyed by an accident.
On 31-12-2005, plant costing Rs. 2,000 was returned to stores and material at site was valued
at
Rs. 1,500. Cost of uncertified work was Rs. 1,000. Charge 10% depreciation on plant.
Prepare Contract Account for the year 2005 and Balance Sheet as on 31-12-2005.

Ms. Annapoorna. M., Associate Professor, Department of Commerce & Management, Seshadripuram
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