Introduction to Contract Accounting
MEANING OF CONTRACT:
● Contract costing is a special type of Job costing where the unit of cost is a single contract
● Contract means a big Job in which work is done at site and not in factory premises.
● Contract costing is also termed as Terminal Costing. The principles of Job costing are applicable to contract costing and is used by such concerns of builders public works contractors, constructional and mechanical engineering firms and ship builders etc. who undertake work on a contract basis.
FEATURES OF CONTRACT COSTING:
Contract costing usually shows the following features:
1. Contracts are generally of Large size and, therefore, a contractor usually carries out a small number of contracts at a particular point of time. 2. A contract generally takes more than one year to complete. 3. Work on contracts is carried out at the site of contracts and not in factory premises. 4. Each contract undertaken is treated a cost unit. 5. A separate contract account is prepared for each contract in the books of contractor to ascertain profit and loss on each direct. 6. Most expenses 7. Nearly all labour cost will be direct. 8. Plant and equipment may be purchased for the contract or may be hired for the duration of the contract.
COMPARISON BETWEEN JOB AND CONTRACT COSTING
Basis Job costing Contract costing
Size A job is small in size The contract is big in size
Place of work A job costing is performed in the workshop of the proprietor
The contract is executed mostly at site.
Time for completion A job usually takes less time for completion of work
Whereas a contract takes more time to complete the work
Payment of price The selling price of a job is paid in full after completing the job.
But in case of a contract, the price is paid in various instalments.
Investment There is a less investment in case of job costing
It requires huge investment .
Nature of expenses In job costing expenses may be direct and indirect.
But in case of contract costing most of the expenses are direct in nature.
CONTRACT COSTING PROCEDURE:
The basic procedure for costing of contracts is as follows:
a. Contract account: each contract is allotted a distinct number and a separate account is opened for each contract. b. Direct costs: most of the costs of a contract can be allocated direct to the contract. All such direct costs are debited to the contract account. Direct costs for contracts include: Materials, labour and supervision, Direct expenses, Depreciation of plant and machinery, sub contract costs etc. c. Indirect costs: contract account is also debited with overheads which tend to be small in relation to direct costs. Such costs are often absorbed on some arbitrary basis as a percentage on prime cost. Or overheals etc, d. Transfer of Materials or Plant: When materials, plant or other items are transferred from the contract, the contract account is credited by that amount. e. Contract price: the contract account is also credited with the contract price. However when a contract is not complete at the end of the financial year, the contract account is credited with the value of work-in-progress as on that date. f. Profit or loss on contract: the balance of contract account represents profit or loss which is transferred to profit and loss account. However, when contract is not completed within the financial year only a part of the profit arrived is taken into account and the remaining profit is kept as reserve to meet any contingent loss on the incomplete portion of the contract.
MEANING OF NOTIONAL PROFIT:
Notional profit is the difference between the value of work-in-progress certified and the cost of such work-in-progress certified. It is computed as follows
Value of work certified Xxxx
Add: Cost of work not yet certified Xxxx
Less: Cost of work to date Xxx
Notional profit Xxxx
MEANING OF ESTIMATED PROFIT
Estimated profit represents the excess of the contract price over the estimated total cost of the contract. It is computed as follows:
Contract Price Xxx
Less: Total cost already incurred Xxx
Less: Estimated additional costs to complete the contract Xxx
Estimated Profit Xxx
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