1 CONTRACT COSTING

2 Method where each contract is treated as cost unit and Profit & Loss is ascertained separately. Contract Costing defined: Employed by undertakings engaged in building, road & bridge construction, ship building, etc.

3 Features of Contract Costing: Large in size and takes more than one year for completion Each contract is a cost unit; expenses get separately recorded and profit too is separately ascertained Expenses are chargeable directly to contract account Specialist sub-contracts may be employed Contd. Involves two parties viz. Contractor and Contractee Contract executed for a price termed as Contract Price

4 Plant may be purchased or hired especially for the contract Employed by undertakings engaged in building, road & bridge construction, ship building, etc. Work carried out at site and not in factory premises Payments made based on stages of completion and depends on Architects Certificate May contain Escalation Clause and Penalty Clause

5 Concepts relating to Contract Accounts: Contractor : Contractee : Contract Price : Work certified : Part of the total contract price which is has been completed and approved by the architect Value for which the contract is undertaken Person on whose behalf the task is being done Person who undertakes the task of doing the job

6 Concepts relating…. Uncertified Work : Cash Paid: Retention Money : Part of the work certified that is held back by the Contractee Part of the work certified that is paid by the Contractee Part of the task done but not approved by the architect of the Contractee

7 Notional Profit: Difference between the value of work certified and uncertified less the cost of work done to date Estimated Profit: Contract Price Less Total cost already incurred Excess of the contract price over the estimated total cost of the contract Less Estimated additional cost required to complete the contract Value of work certified Add Value of work not yet certified Less Cost of work to date

8 Profit on Incomplete Contracts : No profit or Loss be accounted for Notional Profit X 1/3 X Cash received Work Certified (b) When work certified is 25 % or more but less than 50% (a) When work certified is less than 25% complete

9 Profit on Incomplete Contracts : Notional Profit X 2/3 X Cash received Work Certified (d) When the contractor estimates the profit: (c) When work certified is the 50% or more but less than 90% Estimated Profit X Work Certified Contract Price