B.

COM SEM IV (NSS)

ADVANCED ACCOUNTING & AUDITING VII

UNIT 1 CONTRACT COSTING

INTRODUCTION

Contract costing is considered to be one type of job costing. It does not differ in principle
from job costing. A contract is a term used for big jobs undertaken on behalf of
customers, such contracts involve long period of time and are generally undertaken
outside the place where the factory is located. For e.g. construction of building, roads,
bridges or big machinery. The system of cost accounting employed in building or
construction work is termed as “CONTRACT COSTING”

MEANING

1. Contract: Contract refers to a large job / assignment / work order, where the
execution of work is spread over two or more financial years. Generally, a Contract
commences in one financial year, but ends in a different year.
2. Contract Costing: Contract or Terminal Costing involves ascertainment of costs
of contract. It is an extension of principles of job costing for long-term projects like
Civil Construction, Ship Building, Interior Decoration, etc.

TERMS INVOLVED IN CONTRACT

1. CONTRACT PRICE: In case of contract, the work is done for a customer who agrees
to pay fixed price called contract price, which is payable either in installments according
to the progress of work done or on completion of contract.

2. WORK IN PROGRESS: When the contract is not completed fully it is considered

as work in progress. It consists of (i) certified & uncertified work (ii) unused plant &
materials lying at the site at the end of accounting year in order to find out profit or loss
on uncompleted contract the end of accounting year. The WIP account is debited and
contract account is credited and reverse entry will be given in beginning of next year.

In case of uncompleted contract, the total profit is not transferred to profit & loss account
but certain portion of such profit is reserved for contingencies which is known as
reserved profit and it is debited to contract A/c. the WIP account shows debit balance and
is shown on asset side in Balance sheet.

3. CERTIFIED WORK: In case of long term contracts, it is usual for the contractee to
pay certain percentage of the value of work done. The payment will be made by the

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contractee on the basis of work which is certified bt the architect or surveyor, surveyor or
architect issues a certificate giving the value of work done. Such value of work done
which is certified by architect is known as certified work. It is recorded on Cr. Side of
contract A/c under heading of WIP.

4. UNCERTIFIED WORK: Any work done after the receipt of certificate from
architect is known as uncertified work. In case of uncompleted contract it is required to
find out uncertified work. Uncertified work is to be valued always on cost i.e. actual
expenses incurred on materials, labor spent etc. after the receipt of certificate from
architect. For e.g. if certificate of work done is received on 31/5/08 for the accounting
year of 2008, any expense after the 31st May is known as uncertified work. It is also
recorded on Cr. Side of contract A/c under heading of WIP.

5. PRICE ESCALATION CLAUSE:

1. In Fixed Price Contracts, the Contract Price is fixed and pre-determined. If there is
an increase in prices of materials, rates of labor, etc. during the period of execution of
a contract, the Total Contract Costs may rise and the Contractor's profit may be
reduced.
2. This increase in prices may induce the Contractor to use materials of lower quality
and price in order to maintain his profit margin on the contract.
3. To overcome such a situation, the agreement generally contains a stipulation that the
Contract Price will be increased by an agreed amount or percentage, if the prices of
Materials, Wages, etc. rise beyond a particular limit. Such a stipulation / condition is
called Escalation Clause.
6. SUB COMTRACT COST: When a contactor undertakes a big contract, he may
not be able to do the whole work himself. Hence, he gives certain types of small works
by subcontract to others in order that work may be completed on time. For e.g. in
construction of building a small work like paints, electricity etc given to some other by
contractor himself. Such expenses are directly charged to contract A/c & debited to
contract A/c.
7. SPECIAL PLANT/MACHINE: It is plant pr machine bought specially for the
purpose of contract only. When purchased recorded on debit side of contract A/c. In
case of loss by fire or any other reason totally it is considered as loss & claim admitted
by insurance Co. Cr. to contact A/c. In case of sale its selling price is only recorded on
Cr. Side with no effect of profit or loss, without deducting depreciation.

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 TREATMENT OF PROFIT / LOSS IN CONTRACT

CASES TREATMENT OF PROFIT

1. If contract is (100%) fully completed. a) In case of loss , total loss is transfer to P & L
A/c
b) In case of profit, total profit is transferred to P
& L A/c.
2. If contract is not fully completed
(I) When work done is less than 25% of a) In case of loss, total loss is transferred to P & L
contract price A/c
b) In case of profit, total profit is transferred to
WIP A/c.

(ii) When work done is more than 25% a) In case of loss, total loss is transferred to P & L
contract price. A/c
b) In case of profit, total
Profit is transferred to P&L A/c
= Profit × 2/3 × cash received
certified work
c) Remaining transferred to WIP A/c

(iii) When contract is nearer to a) In case of loss, total loss is transferred to P & L
completion A/c
(estimated expenses are given)
b) in case of profit,
Profit transferred to P&L A/c
= Estimated profit × certified work
Contract price
c) Remaining transferred to WIP A/c

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EXAMPLES
Q: 1 When work done is less than 25% of contract price.
On 1.10.96 Mr. A under took a contract no. 555 for Rs. 2,00,000. The following
information is available in respect of these contracting year ended 31.12.96.
Particulars Amount
(Rs.)
Cash received from Contractee (being 75% of work certified) 30,000
Wages paid 15,000
Material Supplied 20,000
Other expenses 3000
Plant supplied on 1.10.96 20,000
Uncertified work 1100
Material Unused at site 800
Wages due but not paid 600
Provide 10% depreciation on plant uncertified work is valued 10% more than the cost
price. Prepare contract No. 555 account in the books of Mr.A.
Q: 2 From the following particulars relating to a contract, prepare (a) Contract A/c (b)
Contractee’s A/c.
Particulars Amount
(Rs.)
Materials sent to site 85,349
Labour engaged on site 74,375
Plant installed at cost 15,000
Direct expenditure 4,126
Establishment charges 3,167
Materials returned to stores 549
Work certified 1,95,000
Cost of work not certified 4500
Materials on hand, Dec. 31. 1883
Wages accrued on December, 31. 2400
Direct expenditure accrued on Dec. 31 240
Value of plant, Dec.31. 11,000
The contract price has been agreed at Rs. 2,50,000. Cash has been received from the
contractee amounting to Rs. 1,80,000.

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Q: 3 When work done is more than 25% of contract price.

Building contractor has under taken a construction work at a contract price of Rs.
5,00,000 & contract begin at 1.4.96.
Particulars Amount
(Rs.)
Machine installed at site 30,000
Material sent on site 1,70,698
Labor at site (wages) 1,48,750
Direct Expenses 6334
Overhead charges 8252
Materials return from site 1098
Work certified by architect 3,90,000
Cash received 3,60,000
Cost of work yet certified 9000
Material on hand on 31.3.97 3766
Wages accrued on 31.3.97 3380
Value of machine on 31.3.97 22,000
Prepare contract account for the year ended on 31.3.97.
Q: 4 Shree Krishna Co. under took a contract at a price of Rs. 6,30,000 on 1st March,
2000. to construct a building. The following information relating to the contract for the
year ending on 31.12.2000 is extracted from contract ledger.

Particulars Amount
(Rs.)
Materials supplied from stores 1,65,500
Materials bought directly for the contract 54,500
Plant issued (1.4.2000) 40,000
Wages paid 50,500
Supervision charges 18,000
Outstanding wages 4500
Other expenses 6000
Material return to store 2000
Sub contract cost 1425
Material transferred to other contract 40,000
Material at site at the end of the year 15,000
Material transfer from other contract 20,000
Cash received from contractee 2,40,000
(80% of work certified)

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On 30.6.2000 a plant worth Rs. 3000 was destroyed by fire and the insurance company
admitted the claim of Rs. 2000, on 30.9.2000 a plant costing Rs. 2500 and materials
costing Rs. 1500 were sold at Rs. 2250 and Rs. 750 respectively. Provide depreciation
on plant at 20% per annum.
Transfer 2/3 profit on cash basis to profit and loss account. Prepare Contract Account
for the year ending on 31st December, 200.(S.P.U.2002)
Q: 5 The following is the summary of the entries in a contact ledger as on 31st March,
2000 in respect of Contract No.7.
Particulars Amount
(Rs.)
Materials (Direct) 60,000
Material (from stores) 13000
Wages 34,600
Direct expenses 13,400
Establishment charges 16,000
Plant 68,400
Sales of scrap 3640
Sub contract cost 14,400
You are given following information:
1. Accruals on 31.3.2000 are wages Rs. 1600 & direct expenses of Rs. 2200.
2. Depreciation on plant up to 31.3.2000 Rs. 17,100.
3. Included in above summary of abstract are wages Rs. 2000 and other expenses of
Rs. 3000 since certification. The value of materials used since certification is Rs. 4160.
4. Materials on site on 31.3.2000 costs Rs. 20,000.
5. Rs. 1,25,000 had been certified up to 31.3.2000 when 3/8 of the contract remained
on completed.
6. The total contract price is Rs. 2,00,000.
Prepare contract Account No. 7 and show what profit or loss should be taken into
account for the year ended 31.3.2000. (S.P.U. 2001)
Q: 6 Vidit construction company undertook a contract at a price of Rs. 6,00,000 on 1 st
January,1999 to construct a building. The following information is relating to the
contract for the year ending to 31.12.99 is extracted ledger.

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Particulars Amount
(Rs.)
Materials supplied from store 1,50,000
Materials bought directly for the contract 70,000
Plant issued (1.4.99) 40,000
Wages paid 50,000
Supervision charges 20,000
Outstanding wages 5000
Other expenses 4000
Materials returned to stores 2000
Outstanding other expenses 425
Sub contract cost 1000
Materials transferred to other contract 40,000
Materials at site at the end of the year 15,000
Materials transferred from other contract 20,000
Cash received from contractee 2,40,000
(80% of work certified)
On 30.6.99 a plan worth Rs. 3000 was destroyed by fire and the insurance company
admitted the claim of Rs. 2000. On 30.9.99 a plant costing Rs. 2500 and materials
costing of Rs. 1500 were sold at Rs. 2250 and Rs. 750 respectively. Provide
depreciation on plant at 20% per annum.
Transfer 2/3 profit on cash basis to profit & Loss account.
Prepare contract acoount for the year ending on 31st December, 1999. (S.P.U. 2000)
Q: 7 Deep construction company took a contract to construct a building for a
commerce college in Anand at a price of Rs. 20,00,000. It commenced the work on 1-
4-2003 and incurred the following expenditure up to 31.12.2003.
Materials 2,80,000
Machines issued (1.4.03) 1,80,000
Wages paid 4,10,000
Direct Expenses 65,000
Indirect expenses 36,000
Cost of sub contract 24,000
You obtain the following other information:
1. Outstanding wages Rs. 15,000 and direct expenses Rs. 10,000 on 31.12.03.
2. Materials worth Rs. 10,000 are destroyed by accident, scrap of the material has
realized Rs. 4000.

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3. Out of machines, a machine costing Rs. 30,000 has been sold at Rs. 24,000 on
30.06.03, while a machine costing Rs. 20,000 was burnt by fire on 1.10.03 and
insurance company accepted a claim of Rs. 15,000 against it.
4. Included in the above summary of entries are wages of Rs. 16,000 and other
expenses of Rs. 8000 since certification. The value of materials used since certification
is Rs. 12,000.
5. Cash received Rs. 10,08,000 being 90% of work certified.
6. Provide 10% depreciation on machines.
7. Materials lying on site as on 31.12.03 Rs. 22,800.
8. Transfer 2/3 of profit to profit and loss as per cash basis.
Prepare contract account.
Q: 8 A contractor undertook a contract of Rs. 20,00,000 and commence its work from
1.4.2002. The accounting year ends on 31.12.2002. Figures relating to this contract are
as under.

Particulars Amount
(Rs.)
Direct materials 4,40,000
Materials issued from stores 60,000
Wages 2,50,000
Diecr expenses 14,000
Indirect expenses 24,000
Architect fees 16,000
Sub contract cost 8000
Administrative and other expenses 12,000
Materials returned to stores 20,000
Machines issued (1.4.02) 2,00,000
Scrap sold 1200
Additional information.
1. Out of materials issued, materials of Rs. 20,000 were immediately sold for Rs.
15,000.
2. Outstanding wages of Rs. 12,000 and direct expenses Rs. 4000 on 31.12.02.
3. On 30.6.02 a machine worth Rs. 32,000 was supplied to another contract.
4. A machine worth Rs. 36,000 was burnt by fire on 31.7.02 and insurance company
accepted a claim of Rs. 24,000.
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5. On 1.10.02 a machine worth Rs. 12,000 has been sold at Rs. 11,200.
6. Provide 10% depreciation on machines.
7. The cost of work uncertified was Rs. 50,000.
8. On 31.12.02 materials at site were Rs. 40,000.
9. Cash received was Rs. 9,20,000 being 80% of work certified.
From the above information prepare contract Account and also calculate profit on
scientific basis.
Q: 9 The following is the summary of entries in a contract ledger of Shreyas
Construction.
Company as on 31.12.2009
Particulars Amount
(Rs.)
Direct Materials 60,000
Material issue from stores 40,000
Wages 30,000
Direct Expenses 15,000
Sub contract cost 19,000
Plant ( including special plant of Rs. 20,000) issued on 60,000
01.01.09.
Sale of Scrap 6000
Additional information
1. Accrual on 31.12.2009 was wages Rs. 10,800 and direct expenses Rs. 6000.
2. The cost of work uncertified was 1/10th of the certified work.
3. Special plant was destroyed on 30.09.2009 by fire and insurance company admitted
a claim of Rs. 8000.
4. Plant of Rs. 16,000 was sold for Rs. 15,000 on 30.06.09.
5. Materials of Rs. 4000 were partly destroyed by fire were sold for Rs. 1600.
6. Materials at site on 31.12.09 was Rs. 2000.
7. Cash received from contract was Rs. 1,80,000 being 75% of work certified.
8. Contract price was Rs. 3,00,000.

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9. Charge depreciation on plant at 10% p.a.

10. Transfer the profit on scientific basis to profit & loss account.
Prepare contract account and also show necessary calculations.
Q: 10 Shreya Construction Co. took a contract to construct a building for a pharmacy
college in Vallabh Vidhyanagar at a price of Rs. 25,00,000. It commenced the work on
01.04.2007 and incurred the following expenditure up to 31.12.2007.
Materials 3,50,000
Machines issued (1.4.07) 2.25,000
Wages paid 5,12,500
Direct Expenses 81,260
Indirect expenses 45,000
Cost of sub contract 30,000
You have been given the following information.
1. Outstanding wages Rs. 18,750 and direct expenses Rs. 12,500 on 31.12.2007.
2. Materials worth Rs. 12,500 are destroyed by accident, scrap of the materials has
realized Rs. 6000.
3. Out of machines a machine costing Rs. 45,000 has been sold at 36,000 on 30.06.07.
While a machine costing Rs. 25,000 was burnt by fire on 1.10.07 and insurance
company accepted a claim of Rs. 20,000 against it.
4. Included in the above summary of entries are wages of Rs. 20,000 and other
expenses of Rs. 10,000 since certification. The value of materials used since
certification is Rs. 15,000.
5. Cash received Rs. 12,60,000 being 90% of the work certified.
6. Materials lying on site as on 31.12.07 Rs. 28,125.
7. Provide 10% depreciation on machines.
8. Transfer the profit on scientific basis to P & L A/c.
Prepare contract account.
Q: 11 A company undertook a contract to construct a bridge. The following particulars
relate to this bridge for the year ended on 31st March, 2006.
Particulars Amount
(Rs.)
Direct materials issued from stores 1,00,000
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Wages for laborer 60,000

Plant issued 1,00,000
Direct expenses 35,000
Other overheads 10,000
Materials lost by theft 2,000
Materials in hand at 31st March 06 5000
Wages accrued at 31st March 06 3,000
Cost of extra work done 2,000
Cash received for extra work 3,000
Value of work certified 2,50,000
Cost of work uncertified 15,000
Contract was commenced on 1st April 2005. Plant was issued on same and is to be
depreciated at 15% p.a. Cash received from contract is 80% of the work certified.
Prepare Contract Account when contract price is Rs. 12,00,000.
Q: 12 Ram Construction Ltd under took a contract to construct a bridge at contract
price Rs. 15,00,000. The contractee has to make progress payment of 75% of the work
certified and remaining amount is to be paid on completion of contract.
The contract was commenced on 1st January, 2003 and the following information is
available in respect of contract for the year ended on 31.12.2003.
Particulars Amount
(Rs.)
Amount received from contractee up to 31.12.03 3,37,500
Uncertified work on 31.12.03 30,000
Materials unused at site on 31.12.03 9500
Plant at site on 31.12.03 (depreciated value) 25,500
Wages due but not paid on 31.12.03 2600
Profit reserved for the year 2003. 25,000
The following information is supplied in respect of contract for the year ended on
31.12.04.

Particulars Amount
(Rs.)
Materials supplied 1,70,000
Materials transferred to other contracts 32,000
Materials transferred from other contracts 95,000
Overhead chargeable to contract 45,000
Materials returned to stores 3200
Materials stolen away from site (at cost) 2800

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Sale of materials ( cost of Rs. 6800) 8000

Wages paid 90,200
Other expenses 11,800
Other plant issued on 1.9.2004 12,000
Work certified on 31.12.2004 10,00,000
Material unused at site on 31.12.2004 23,925
Wages due but not paid on 31.12.2004 7400
Provide depreciation on plant at 15%. The cost of work done but not certified was Rs.
27000. This was certified later for Rs. 30,000.
Prepare contract account, contractee’s account, work in progress account, assuming
that the contractor takes 2/3rd profit on cash basis to profit and loss account.
(S.P.U.2019)
Q: 13 Rucha Construction Co. Ltd took up a contract for the construction of building
at a contract price of Rs. 1,80,00,000. The contractor has to make progress payment of
82% of the work certified and the remaining is to be paid on completion of contract.
Building operations started on 1st April, 2005 and its following information are
available in respect of the contract for the year ended 31st March, 2006.

Particulars Amount
(Rs.)
Amount received from contractee up to 31.3.06 56,17,000
Uncertified work on 31.3.06 5,53,000
Materials unused at site on 31.3.06 1,57,000
Plant at site on 31.3.06 (depreciated value) 8,50,000
Wages due but not paid on 31.3.06 28000
Profit reserved for the year 2005-06. 3,60,000
The following information is supplied at respect of contract for the year ended 31st
March, 2007.

Particulars Amount
(Rs.)
Materials supplied 25,20,000
Materials transferred to other contracts 4,20,000
Materials transferred from other contracts 10,40,000
Overhead chargeable to contract 5,50,000
Materials returned to stores 45,000
Water pipe of 1000 ft. purchased at Rs. 15 per ft. was stolen
away from the site.
Profit on sale of materials (25% profit on cost price) 15,000
Wages paid 10,37,000

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Other expenses 2,53,000

Other plant issued on 1.12.2006 1,80,000
Work certified on 31.3.2007 1,30,00,000
Material unused at site on 31.3.2007 5,83,750
Wages due but not paid on 31.3.2007 63,000
1. Provide depreciation on plant at 12.5%.
2. The cost of work done but not certified was Rs. 5,74,000 on 31.03.2007. This was
certified later for Rs. 60,000.
3. Contractor takes 2/3 profit on cash basis to profit & loss account.
4. Prepare the contract account for the year ended 31.03.2007.
Q: 14 The Indian Construction Co. Ltd. has undertaken the construction of a bridge
over the River Yamuna for a Corporation. The value of the contract is ` 15,00,000
subject to retention of 20% until one year after certified completion of the
contract, and final approval of the Corporation’s engineer. The following are the
details as shown in the books on 30th June, 2015.

Particulars Amount
(Rs.)
Labour on site 4,05,000
Materials direct to site 4,20,000
Materials from stores 81,200
Hire and use of plant 12,100
Direct expenses 23,000
General overhead allocated to the contract 37100
Materials on hand on June 30th, 2015 6300
Wages accrued on June 30th, 2015 7800
Direct expenses accrued on June 30th 2015 1600
Works not yet certified at cost 16,500
Amount certified by the Corporation’s engineer 11,00,000
Cash received on account 8,80,000
Prepare (a) Contract Account

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Q: 15 Modern contractors have undertaken the following two contracts on 1st

January,2015.

Contract A Contract B

` `

Materials sent to sites 85,349 73,267

Labour engaged on sites 74,375 68,523

Plants installed at sites at cost 15,000 12,500

Direct expenditure 3,167 2,859

Establishment charges 4,126 3,852

Materials returned to store 549 632

Work certified 1,95,000 1,45,000

Cost of work not certified 4,500 3,000

Materials in hand 31st Dec., 1,883 1,736

2015

Wages accrued 31st Dec., 2015 2,400 2,100

Direct expenditure accrued 31st 240 180

Dec., 2015

Value on plant 31st Dec., 2015 11,000 9,500

The contract price have been agreed at 2,50,000 for contract A and 2,00,000 for
contract B . Cash has been received from the contractee’s as follows: Contract A
1,80,000 and for Contract B 1,40,000.
Prepare Contract Account.

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Q: 16 The following information relates to a building contract for 10,00,000.

Particulars Year 2014 Year 2015
Materials issued 3,00,000 84,000
Direct wages 2,30,000 1,05,000
Direct expenses 22,000 10,000
Indirect expenses 6000 1400
Work certified 7,50,000 10,00,000
Work uncertified 8000 -
Materials at site 5000 7000
Plant issued 14,000 2000
Cash received from contractee 6,00,000 10,00,000
The value of plant at the end of 2014 and 2015 was 7000 and 5000 respectively.
Prepare contract account.
Q: 17 A firm of contractors undertook three contracts on 1st April, 2014, 1st October,
2014 and 1st January, 2015. On 31st March, 2015, when their accounts were made up,
the position was as follows:

Particulars I II III
Contract price 4,00,000 1,35,000 1,50,000
Materials 72,000 29,000 10,000
Wages 1,10,000 56,200 7000
General expenses 4000 1400 500
Plant 20,000 8000 6000
Materials on hand 4000 2000 1000
Wages outstanding 3400 1800 800
Work certified 2,00,000 80,000 18000
Cash received 1,50,000 60,000 13500
Work uncertified 6000 4000 1050
General expenses outstanding 600 200 100
The plants were installed on the respective dates of the contract and depreciation is
taken at 10% p.a. Prepare contract A/c.
Q: 18 Harshiv construction company undertook the construction of a building at a
contract price Rs. 4,80,000. The date of commencement of contract was 1st April,
2017. The following cost information is given for the year ended 31st March, 2018.
Particulars Rs.
Material (direct) 1,53,900
Materials (from sores) 31,500
Wages 81,900

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Direct expenses 26,100

Establishment charges 9000
Plant 96,600
Sub contract costs 9000
Sale of scrap 6000
Additional information.
1. Accruals on 31st March, 2018 were wages Rs. 8100 and direct expenses Rs. 6300.
2. The cost of work uncertified included materials Rs. 9600, wages Rs. 4800 and direct
expenses Rs. 3000.
3. Plant worth Rs. 15000 and material of Rs. 6000 were destroyed by fire.
4. Plant costing Rs. 21000 was sold for Rs. 18000 and materials costing Rs. 9000 were
sold for Rs. 12000.
5. Depreciation till 31st March, 2018 on plant was Rs. 66,000.
6. Materials at site were Rs. 15000.
7. Cash received from the contractee was Rs. 2,88,000 being 80% of work certified.
8. Transfer 3/4th profit on cash basis to profit and loss account.
Prepare Contract Account. (S.P.U.2019)
Q: 19 Contractor of a Mansi Ltd has taken a contract of Rs. 5,00,000. Work was start
on 1st April, 2016. The information of contract up to the 31st March, 2017 is as under.

Particulars Rs.
Supplied materials 1,00,000
Machine 30,000
Administrative expenses 68,000
Direct expenses 2698
Labour 1,40,000
Expenses of sub contract 8750
Indirect expenses 8252
Material returned to store 1098
Work certified 3,90,000
Cash received 3,60,000
Work uncertified 8000
Other expenses 6334

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Additional information.
1. The value of material as on 31st March,2017 was of Rs. 2766.
2. Depreciation on machine is to be calculated at 30%.
3. Outstanding labour as on 31st March, 2017 is Rs. 5380.
4. The value of stolen material from the sight is of Rs. 3000.
Prepare contract account, WIP account, and the profit is to be transferred to P & L A/c
as 2/3rd cash basis. (S.P.U.2018)
Q: 20 How will you record the following transaction in the contract account. On
1.3.98 a special plant of Rs. 36,000 was purchased for contract no. 100. This plant is to
be depreciated at 9% p.a. On 31.12.98. The plant was completely destroyed by fire,
insurance company admitted a claim Rs. 15000.

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