Page 1

V’Smart Academy ( 88883 88886) Chapter 3 : Contract Costing

3 Contract Costing

• Contract costing is a form of specific order costing where

Contract
job undertaken is relatively large and normally takes period
Costing longer than a year to be getting completed.

• The portion of work which is certified as complete by

architecture, surveyor, engineer or any other person as may
Work Certified be agreed between the contractor and contractee is called
work certified.

• It represents the cost of the work which has been carried

Work
out by the contractor but has not been certified by the
uncertified architect. It is always shown at cost price.

✓ It is method of costing where cost is calculated for each contract _Cost unit is contract.

✓ For payment of money, work done is divided into work certified & work uncertified.
Work certified = at cost + profit
Work uncertified = at cost

✓ Contract account
Particulars Amount Particulars Amount

To Direct Material By Work Certified

To Direct Labour By Work Uncertified

To Overheads By Plant at Site

To Plant (At Cost) By Material at site

To Notional profit c/d

XXXX XXXX

To P & L A/c (Transfer of By Notional profit b/d

Profit)

To Profit reserved

RAJ AWATE (Whatsapp 7887 7887 06)

 Page 2

V’Smart Academy ( 88883 88886) Chapter 3 : Contract Costing

XXXX XXXX

1. METHOD OF TRANSFER OF PROFIT ON INCOMPLETE CONTRACT

To obtain profit on a contract for a year, a contract account is prepared &

notional profit is calculated.
% of work completion Profit transferred
Upto 25% Nil
25 – 50% Cash received
1/3 * notional profit *
work certified

50 – 90% Cash received

2/3 * notional profit * work certified

Above 90 % As per estimated profit basis

work certified
% of work completion = * 100
contract price

2. TRANSFER OF PROFIT AS PER ESTIMATED PROFIT

Estimated profit = Contract price – estimated cost

= Contract price – ( cost to date + further cost )
Where, Estimated cost = total cost of entire contract

Profit is transferred by using following formula :

work certifid Cash received
Profit transferred = estimated profit * Contract price * work certified

3. ESCALATION CLAUSE

“ When price of material &labour increase beyond certain limit then contract price can
be increased proportionately. “ _ applicable only in case of fixed contract.

RAJ AWATE (Whatsapp 7887 7887 06)

 Page 3

V’Smart Academy ( 88883 88886) Chapter 3 : Contract Costing

QUESTION 1.
A construction company undertook a contract at an estimated price of ₹ 108 lakhs
The relevant data for the year ended 31.03.2014 are
as under:

(` ₹000)
Materials issued to site 5,000
Direct wages paid 3,800
Plant hired 700
Site office costs 270
Materials returned from site 100
Direct expenses 500
Work certified 7,200
Progress payment received 6,000
A special plant was purchased specifically for this contract at ₹ 8,00,000 and after use on
this
contract till the end of 31.02.2014, it was valued at ₹ 5,00,000. This cost of materials at site
at the
end of the year was estimated at ₹ 18,00,000. Direct wages accrued as on 31.03.2014 was
₹ 1,10,000.
Required
Prepare the Contract Account for the year ended 31st March, 2014 and compute the profit
to
be taken to the Costing Profit and Loss account.

Solution
Contract Account for the year ended 31st March, 2014

(₹’000) (₹’000)
To Material issued By Material at site
to site
To Direct wages By Material
returned
Add: Outstanding By Work certified
wages
To Plant hire
To Site office cost
To Direct expenses
To Depreciation
(special plant)
To Notional profit

To Costing Profit & By notional profit

Loss A/c b/d
To profit reserved

RAJ AWATE (Whatsapp 7887 7887 06)

 Page 4

V’Smart Academy ( 88883 88886) Chapter 3 : Contract Costing

Working Notes
Value of work cetified
1. Percentage of contract completion = × 100
Value of the contract

2.

QUESTION 2.
Modern Construction Ltd. obtained a contract No. B-37 for ₹ 40 lakhs. The following
balances
and information relate to the contract for the year ended 31st March, 2014:

1.4.2013(₹) 31.3.2014 (₹)

Work-in-progress:
Work certified 9,40,000 30,00,000
Work uncertified 11,200 32,000
Materials at site 8,000 20,000
Accrued wages 5,000 3,000
Additional information relating to the year 2013-2014 are:

(₹)
Materials issued from store 4,00,000
Materials directly purchased 1,50,000
Wages paid 6,00,000
Architect’s fees 51,000
Plant hire charges 50,000
Indirect expenses 10,000
Share of general overheads for B-37 18,000
Materials returned to store 25,000
Materials returned to supplier 15,000
Fines and penalties paid 12,000
The contractee pays 80% of work certified in cash. You are required to prepare:
(i) Contract Account showing clearly the amount of profits transferred to Profit and Loss
Account.
(ii) Contractee’s Account.
(iii) Balance Sheet
Solution:
Books of Modern Constructions Ltd.
Contract No. B-37 Account for the year ended 31st March, 2014

Particulars (₹) Particulars (₹)

RAJ AWATE (Whatsapp 7887 7887 06)
 Page 5

V’Smart Academy ( 88883 88886) Chapter 3 : Contract Costing

To WIP b/d: By Materials returned to
Store
- Work certified By Material returned to
suppliers
- Work uncertified By WIP c/d :
To Stock (Materials) b/d Work Certified
To Materials issued Uncertified work
To Materials purchased By Materials stock c/d
To Wages paid
Less: Opening O/s
Add: Closing O/s
To Architect’s fees
To Plant Hire charges
To Indirect expenses
To General overheads
To Notional profit c/d
To Costing Profit and Loss By Notional Profit b/d
A/c

To profit reserved

Note: Fines and penalties are not shown in contract accounts.

Contractee’s Account

(₹) (₹)
To Balance c/d By Balance b/d

By Bank

QUESTION 3.

From the following particulars compute a conservative estimate of profit by 4 methods on a

contract which has 80 percent complete:

(₹)
Total expenditure to date 8,50,000
Estimate further expenditure to complete the contract 1,70,000
Contract Price 15,30,000
Work Certified 10,00,000
Work not certified 85,000
Cash received 8,16,000

Solution:
Working Notes:
(i) Calculation of Notional Profit
RAJ AWATE (Whatsapp 7887 7887 06)
 Page 6

V’Smart Academy ( 88883 88886) Chapter 3 : Contract Costing

= (Work certified + work not certified) – Total expenditure to date

(ii) Calculation of Estimated Profit

Contract Price – (Expenditure to date + Further expenditure to be incurred)

Computation of Conservative Estimate of Profit by following methods:

2 Cash received
1. Notional Profit × 3 × work certified
=
Cost of work done Cash received
2. Estimated Profit × Estimated total Cost × work certified
=
Cash received
3. Estimated Profit × Contract Price
=

Work Certified Cash Received

4. Notional Profit × × Work Certified
Contract Price
=
Work Certified
5. Estimated Profit × =
Contract Price

Cost of work done

6. Estimated Profit × Estimated total Cost

=
Work Certified
7. Notional Profit × =
Contract Price

QUESTION 4.
Paramount Engineers are engaged in construction and erection of a bridge under a long-
term
contract. The cost incurred upto 31.03.2014 was as under:

Amount (`) in lakhs

Fabrication Costs:
RAJ AWATE (Whatsapp 7887 7887 06)
 Page 7

V’Smart Academy ( 88883 88886) Chapter 3 : Contract Costing

Direct Materials 280
Direct Labour 100
Overheads 60
440
Erection Cost to date 110
550
The contract price is ₹ 11 crores and the cash received on account till 31.03.2014 was ₹ 6
crores.
The technical estimate of the contract indicates the following degree of completion of work.
Fabrication – Direct Material – 70%, Director Labour and Overheads 60% Erection – 40%.
You are required to estimate the profit that could be taken to Costing Profit and Loss
Account
against this partly completed contract as at 31.03.2014.

Solution
Estimation of Profit to be taken to Profit and Loss Account against partly completed
contract as at 31.03.2014.
2 Cash received
Profit to be taken to P/L Account = × Notional Profit × Work Certified
3

Working Notes :

1. Statement showing estimated profit to date and future profit on the completion of
Contract

Particulars Cost to date Further Costs Total

(%) Amount (%) Amount Cost
Completio (₹) completion (₹) (₹)
n (a) to be done (b) (a) +
to date (b)
Fabrication costs:
Direct material
Direct labour
Overheads
Total Fabrication
cost (A)
Erection cost: (B)
Total estimated
costs (A+B)
Profit

2. Profit to date (Notional Profit) and future profit are calculated as below:

RAJ AWATE (Whatsapp 7887 7887 06)

 Page 8

V’Smart Academy ( 88883 88886) Chapter 3 : Contract Costing

Estimated profit on the whole contract × Cost to date
Profit to date (Notional Profit)=
Total Cost

3. Work Certified

4. Degree of Completion of Contract to date:

QUESTION 5.

M/s ABID Constructions undertook a contract at a price of ` 171.00 lacs. The relevant data
for
the year ended 31st March, 2014 are as under:

(₹’000)
Material issued at site 7700
Direct Wages paid 3300
Site office cost 550
Material return to store 175
Work certified 12650
Work uncertified 225
Progress Payment Received 10120
Prepaid site office cost as on 31-03-2014 50
Direct wages outstanding as on 31-03-2014 100
Material at site as on 31-03-2014 110
Additional Information:
(a) A plant was purchased for the contract at ₹ 8,00,000 on 01-12-2013.
(b) Depreciation @ 15% per annum is to be charged.
(c) Material which cost ₹ 1,30,000 was destroyed by fire.
Prepare:
(i) Contract Account for the year ended 31st March, 2014 and compute the profit to be
taken
to the Profit & Loss Account.
(ii) Account of Contractee.
(iii) Profit & Loss Account showing the relevant items.
(iv) Balance Sheet showing the relevant items

RAJ AWATE (Whatsapp 7887 7887 06)

 Page 9

V’Smart Academy ( 88883 88886) Chapter 3 : Contract Costing

Solution:
(i) Contract Account
Particulars Amount Particulars Amount
(₹ in ‘000) (₹ in ‘000)
To Material issued By Material
returned
To Direct wages By Profit & Loss
A/c
(Material
Destroyed by
fire)
Add: Outstanding By W-I-P:
To Site Office Cost - Work uncertified
Less: Prepaid - Work certified
To Depreciation* By Material at site
To Notional Profit

To Profit & Loss By Notional Profit

A/c

To W-I-P (Reserve)

* Depreciation on plant =

(ii) Contractee’s Account

Particulars Amount Particulars Amount

(₹ in ‘000) (₹ in ‘000)
To Balance c/d By Bank A/c

(iii) Relevant items of Profit & Loss Account

Particulars Amount Particulars Amount
(₹ in ‘000) (₹ in ‘000)
To Contract A/c By Contract A/c

To Net Profit

(iv) Balance Sheet (Extracts) as on 31st March, 2014 (Amount in ‘000)

Liabilities Amount Amount Assets Amount Amount
(₹) (₹) (₹) (₹)

RAJ AWATE (Whatsapp 7887 7887 06)

 Page 10

V’Smart Academy ( 88883 88886) Chapter 3 : Contract Costing

Plant at
cost
Add: Profit Less: Dep.
Contract W-
I-P:
Outstanding -Uncertified
Wages
-Certified
-Reserve
Less:
Advances
Materials at
site
Prepaid
exp.
Working Notes:
WorkCertified
1. Percentage of Completion = Value of ontract ×100

=
2. Profit from the incomplete contract
2 CashRe ceived
=Notional Profit × 3 × WorkCertified
=
=

QUESTION 6.

Z Limited obtained a contract No. 999 for ₹ 50 lacs. The following details are available in
respect of this contract for the year ended March 31, 2014:

(₹)
Materials purchased 1,60,000
Materials issued from stores 5,00,000
Wages and salaries paid 7,00,000
Drawing and maps 60,000
Sundry expenses 15,000
Electricity charges 25,000
Plant hire expenses 60,000
Sub-contract cost 20,000
Materials returned to stores 30,000
Materials returned to suppliers 20,000
The following balances relating to the contract No. 999 for the year ended on March 31,
2013

RAJ AWATE (Whatsapp 7887 7887 06)

 Page 11

V’Smart Academy ( 88883 88886) Chapter 3 : Contract Costing

and March 31, 2014 are available:

as on 31st March, 2013 as on 31st March, 2014

Work certified 12,00,000 35,00,000
Work uncertified 20,000 40,000
Materials at site 15,000 30,000
Wages outstanding 10,000 20,000
The contractor receives 75% of work certified in cash.
Prepare Contract Account and Contractee's Account.

Solution:
Contract No. 999 Account for the year ended 31st March, 2014

Particulars Amount Particulars Amount

(₹ ) (₹ )
To Work in progress b/d: By Material returned to
store
- Work certified By Material returned to
Suppliers
- Work uncertified By Stock (Material) c/d
To Stock (Materials) b/d By Work in progress c/d:
To Material purchased - Work certified
To Material issued - Work uncertified
To Wages paid
Less: Opening O/s
Add: Closing O/s
To Drawing and maps*
To Sundry expenses
To Electricity charges
To Plant hire expenses
To Sub- contract cost
To Notional profit c/d

To Costing P& L A/c By Notional profit b/d

To WIP Reserve

*Assumed that expenses incurred for drawing and maps are used exclusively for this
contract only.

Contractee’s Account

Particulars Amount Particulars Amount

(₹ ) (₹ )
To Balance c/d By Balance b/d

By Bank A/c

RAJ AWATE (Whatsapp 7887 7887 06)

 Page 12

V’Smart Academy ( 88883 88886) Chapter 3 : Contract Costing

Working Note:
1. Profit to be Transferred to Costing Profit & Loss account:
𝐖𝐨𝐫𝐤 𝐂𝐞𝐫𝐭𝐢𝐟𝐢𝐞𝐝
a) 𝐏𝐞𝐫𝐜𝐞𝐧𝐭𝐚𝐠𝐞 𝐨𝐟 𝐜𝐨𝐦𝐩𝐥𝐞𝐭𝐢𝐨𝐧 = × 𝟏𝟎𝟎
𝐕𝐨𝐥𝐮𝐞 𝐨𝐟 𝐂𝐨𝐧𝐭𝐫𝐚𝐜𝐭
=
b) Profit to be transferred to Costing Profit & Loss Account
𝟐 𝐂𝐚𝐬𝐡 𝐫𝐞𝐜𝐞𝐢𝐯𝐞𝐝
= 𝟑 × 𝐍𝐨𝐭𝐢𝐨𝐧𝐚𝐥 𝐏𝐫𝐨𝐟𝐢𝐭 × 𝐖𝐨𝐫𝐤 𝐂𝐞𝐫𝐭𝐢𝐟𝐢𝐞𝐝
=

RAJ AWATE (Whatsapp 7887 7887 06)