contract costing problem solved in class incl theory 2015

CONTRACT COSTING
Contract costing is “A form of specific order costing; attribution of costs to individual
contracts”.
A contract cost is “Aggregated costs of a single contract; usually applies to major long
term contracts rather than short term jobs”.
Features of long term contracts:
· By contract costing situations, we tend to mean long term and large contracts:
such as civil engineering contracts for building houses, roads, bridges and so on.
We could also include contracts for building ships, and for providing goods and
services under a long term contractual agreement.
· With contract costing, every contract and each development will be accounted for
separately; and does, in many respects, contain the features of a job costing
situation.
· Work is frequently site based.
We might have problems with contract costing in the following areas
· Identifying direct costs
· Low levels of indirect costs
· Difficulties of cost control
· Profit and multi period projects
The source of the following has eluded me: my sincere gratitude for whoever the author
might be.
"Contract Costing such jobs take a long time to complete & may spread over two or more
of the contractor's accounting years”.
Features of a Contract
· The end product
· The period of the contract
· The specification
· The location of the work
· The price
· Completion by a stipulated date
· The performance of the product
Collection of Costs :
Desirable to open up one or more internal job accounts for the collection of costs.
If the contract not obtained, preliminary costs be written off as abortive contract costs in
P&L In some cases a series of job accounts for the contract will be necessary:
· to collect the cost of different aspects
· to identify different stages in the contract
Special features
· Materials delivered direct to site.
· Direct expenses
· Stores transactions.
· Use of plant on site
Two possible accounting methods:
Where a plant is purchased for a particular contract & has little further value to the
business at the end of the contract
Where a plant is bought for or used on a contract, but on completion of the contract it has
further useful life to the business
Alternatively the plant may be capitalised with Maintenance and running costs charged to
the contract."

Profit of Incomplete contract :-
1) When % of completion is less than or equal to 25% then full Notional profit is
transferred to reserve.
2) When % of completion is above 25% but less than 50% following amount should
be credited to profit & loss a/c = 1/3 * Notional Profit * {Cash received / Work
certified}
3) When % of completion is more than or equal to 50% then the amount transferred
to profit is = 2/3 * Notional Profit * {Cash received / Work certified}
[Balance is transferred to reserve a/c]
☺ % of completion = {Work certified/Contract price} * 100
4) When the contract is almost complete the amount credited to profit & loss a/c is
a) Estimated total profit * {Work certified / Contract price}
b) Estimated total profit * {Cash received / Contract price}
c) Estimated total profit * {Cost of work done / Estimated total profit}
d) Estimated total profit*   =           {Cost of work done*Cash received
                                                      Estimated total cost * Work certified}
5) Work-In-Progress is shown in Balance Sheet as follows:-
Skeleton Balance sheet

PROBLEMl