Job costing and contract costing both are the methods of costing and used when we receive specific order for performing any work. But after this, there are many differences between job costing and contract costing which we are explaining in four points.
1st Point : Area of Work
→ Job costing is used for calculating cost in very small work like making of specific type of product. For instance, if you receive the order of making 10 chairs, you will used job cost in this specific work instead of using contract costing system.
→ Contract costing is used for calculating the cost in very big work like making of 10 floors building or making of bridge.
2nd Point : Period
→ In job costing, we take that job which can finish within short period.
→ In contract costing, we include that contracts which can finish within one year or more than one year.
3rd Point : Account
→ In job costing, we make job account for every job. In this account, we show different expenses which are paid for completing that job.
→ In contract costing, we open contract account for every contract. In this account, we show all expenses relating to contract and it also show work in progress in the form of work certified and work uncertified. Difference of credit and debit side of this account will show notional profit or loss.
4th Point : Transfer of Profit
→ If specific job is done and finished goods of this job are sold to customers, its all profit will transfer to profit and loss account.
→ In contract costing, we check, how much work is done and on the basis of work certified, we calculate the proportion of notional profit which is transferred to profit and loss account.
CONTRACT COSTING:
Meaning of Contract Costing
Contract costing is that method of costing in cost accounting which is used to collect and identify all the expenses relating to a specific contract. For this purpose, Contractor has to maintain contract ledger in which he has to show contract account.
Contract here means an agreement to complete construction of building or any other engineering work which need many days, months or years to complete.
Contract Account
Contact account is that account who shows all the expenses in its debit side. Credit side of this account, we show value contract price or work certified value. Difference between debit and credit side of will show notional profit or loss.
Following are main Contract Expenses and Costs which shows in Contract Account under Contract Costing :-
1. Material Cost
Material or raw material which is used for construction is the main expense or contract cost and it will be debited in contract account. It is supplied from store or purchased from market directly. If material is transferred from any other contract, then its cost will be adjusted on the basis of material transfer note.
2. Labor Cost
On the basis of wages analysis sheet, labor cost is calculated for a specific contract order. If same labourer is used more than one contract, then time devoted to each contract is calculated and on this basis, labor cost is allocated.
3. Direct Expenses
We also add direct expenses, if any.
4. Overheads
Overheads can be allocated on the basis of some % on cost of material, wages or prime cost or MHR or LHR.
5. Sub- Contract Cost
It will also include in contract cost, if to complete sub-construction for main construction.
6. Cost of Extra Work.
Importance of Contract Costing
Contract costing is important because with this method, we can calculate cost of big jobs. If we do n't know contract costing and calculating of profit under this method, we will usejob costing method and result will not be awesome because many items like value of work certified, notional profit, contract price are not used in job costing. So, it is better for us to learn all things which is in contract costing.
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