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UNIT-4 (Contract Costing) (Autosaved)

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17 views8 pages

UNIT-4 (Contract Costing) (Autosaved)

Uploaded by

amit kumar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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UNIT-4 (CONTRACT AMIT KUMAR

ASSISTANT PROFESSOR

COSTING) IITM JANAKPURI NEW


DELHI
CONTRACT COSTING
Contract costing is a special form of costing which is generally used in Construction
Industries. There are two parties under contract, first party called Contractor and second
party called Contractee.
Price at which contractor ready to take contract called contract price. Generally contract
price determined in advance.
There are following account maintained in the book of contractor
1. Contract Account.
2. Contractee Account.
With the help of Contract account, contractor able to find Profit or Loss from the Contract.
In case of completed contract balancing fig. of Contract account transferred to Profit & loss
account but in case of Incomplete contract balancing fig. transferred to Notional profit and
some part of Notional profit transferred to Profit & loss account and remaining part in
General Reserve account.
CONTRACT ACCOUNT
CONTRACT ACCOUNT

PARTICULARS AMOUN PARTICULARS AMOUNT


T

TO MATERIALS BY MATERIAL AT
TO WAGES SITE
TO GENERAL EXP. BY PLANT AT SITE
TO OVERHEAD BY WIP
TO PLANT AT SITE Work certified
TO NOTIONAL PROFIT Work Uncertified
( Bal. fig.)
TOTAL -------- TOTAL ---------

TO PROFIT & LOSS A/C BY NOTIONAL


TO GENERAL RESERVE PROFIT
(WIP)
PROFIT ON INCOMPLEATE
CONTRACT
In case of incomplete contract, balancing fig. of contact account transferred to
Notional profit and according to following provision it is transferred to profit and
loss account
1. No profit should be transferred to profit and loss account if work certified is less
than 25%.
2. if work certified is 25% or more but less than 50% following amount transferred
to profit and loss account
½ × Notional profit × cash received / work certified
3. if work certified is 50% or more but less than 90 % following amount transferred
to profit and loss account
2/3× Notional profit × cash received/ work certified
4. if work certified is 90% or more than entire profit transferred to profit and loss
account.
% of work certified = amount of work certified/ contract price × 100
WORK CERTIFIED AND
UNCERTIFIED
When the contract is not completed till end of accounting year, the architect is
required to value the work in progress. Such work in progress is classified into work
certified and work uncertified.

Work Certified – this is a part of WIP which has been approved by contractee
architect or engineer for payment. Work certified is valued at contract price and
include element of profit.
Work Uncertified – this is that part of WIP which is not approved by architect or
engineer. This is valued at cost and thus does not include an element of profit.

Both work certified and uncertified appear on the credit side of contract account and
also on the assets side of balance sheet.
ESCALATION CLAUSE & DE-
ESCLATION CLAUSE
This clause is generally provided in contract to cover any likely change in the price
or utilization of material and labour. Thus a contractor is entitled to suitably enhance
the contract price if cost rise beyond the given percentage.
The object of this clause is to safeguard the interest of contractor against
unfavorable change in cost. The escalation clause is of particular importance where
price of material and labour are anticipated to increase or where quantity of material
and labour time cannot be accurately estimated.

Just as an escalation clause safeguard the interest of contractor by upward revision of


the contract price, a de-escalation clause may be inserted to look after the interest of
the contractee by providing for downward revision of the contract price in the event
of cost going down beyond an agreed level.
COST PLUS CONTRACTS
Cost plus contract is a contact in which price is not fixed at the time of entering in
the contract. The contract price is determined by adding an specified amount or
percentage of profit to the cost allowed to the contract. The contractee compensate
the contractor for allowable cost actually incurred by him. Over and above of these
cost contractor is paid a fixed amount or fixed percentage of cost as profit. The
account of contractor are usually subject to audit by the contractee.
Advantage - :
For contractor-
1. there is no risk of loss. 2. protect him from risk of price fluctuations.
3. it simplify work of preparing tenders and quotations.
For contractee- contractee can ensure a fair price of contract by being entitled to
audit the accounts of the contractor.
DIFFRENCE BETWEEN
CONTACT & JOB COSTING
There are following difference between contract costing and job costing
1. In contract costing , most of the cost are chargeable direct to contract accounts.
Under job

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