ACC-4807: Advanced Cost Accounting
Job, Batch, Contract Costing
Introduction:
Job order costing is the method of costing that is applied to determine the cost of specific jobs or lots of production
generally manufactured according to customers' specification.
The main objective of job costing is to determine profit or loss of each job. Before accepting a job, costs are
estimated. It helps in minimizing losses and maximizing profits. The costs per unit can be obtained by dividing the
total costs by the number of units produced.
Types of Job Order Costing: Job order costing can be sub-divided into the following categories.
1. Factory job costing or job costing 2. Batch costing 3. Contract costing.
Factory Job Costing: Factory job costing is used as a means of accumulating cost where products are made to
customer's specifications in the factory.
Batch Costing: Batch costing is used as a means of accumulating cost where products are made in the factory for
stock.
Contract Costing: Contract Costing is used as a means of accumulating cost where works are done to the
customer’s specifications outside the factory.
Salient Features of Job Costing: The salient features of job costing can be mentioned as below:
i) Work is carried out against customers' orders and not for maintaining stock sale. ii) Work must be carried out
according to the specifications of the customers. iii) Each job can be clearly identified from the other, or at least
physical identification is pre-supposed. iv) Each job requires particular attention and skill depending upon the
specification. v) Every job does not pass through all the departments. Nature of the job decides through which
departments it will pass. vi) There is no standardization of jobs. Each job is a separate non-standard work. vii) Each
job is to be charged with its own costs. viii) Work-in-progress at any time depends upon the number of jobs in hand
at that time. A separate work-in-progress record is maintained for each job.
Advantages of Job Costing: The following advantages are claimed of job costing:
i) Profitability of each job can be known separately.
ii) Management, based on past job cost records, can make dependable estimates for similar future jobs.
iii) Job costing shows the material cost, labor cost, factory overheads, administration overheads, selling and
distribution overheads for each job in detail and hence, it facilitates the control of the costs of similar future jobs.
iv) On the basis of budgets, the overhead recovery rates may be pre-determined. This makes working out of the
incidence of overheads for each job easy, but budgetary control becomes necessary to see that there is no gross overor under-recovery of overheads.
v) Under job costing, since each job is clearly distinguished from the other, the spoilage and defectives from each
job can be separately known and hence, they can be controlled.
vi) Job costing facilitates pricing of each job. Rates of profits, according to different types of jobs, are mentioned in
the management policy. The applicable rate is applied on the estimated cost, to ascertain the price.
vii) In case of Government contracts of new nature, often the contract price is agreed at certain per cent added to
cost (i.e., cost plus contracts). Job costing gives much advantage in this case.
viii) Detailed job cost records of the past periods can be preserved and studied to understand the trends of costs of
different elements.
Disadvantages of Job Costing: The following are the principal disadvantages of job costing:
i) The method is costly and laborious owing to much clerical work required to maintain detailed information.
ii) Cost records are made after the costs are incurred. So, control becomes impossible, unless proper estimates or
standards are set, and control is exercised on the actual expenditure with reference to corresponding estimate or
standard.
iii) Previous job cost records may fail to guide the future cost, if there is a fundamental change in the market
conditions. iv) Errors in estimation or in cost records may bring about sad results.
Procedure of Job Order Costing: The procedure of job order costing is as follows:
i) Production Order: When an order is received from customers, the production control department allots a
production order number. Sometimes, sub-numbers are allotted in addition to one master number if the work is subdivided.
BBA-Major in Accounting & Information Systems, Department of Business Administration, International Islamic University Chittagong
ACC-4807: Advanced Cost Accounting
Job, Batch, Contract Costing
ii) Recording of Costs: The costs are collected and recorded for each job under a separate production order number.
Based on the production order, the costing department prepares a job cost sheet for each job. The costs are direct
materials, direct labor, direct expenses and overhead.
iii) Completion of Job: The completion report is sent to the costing department after the completion of a job. The
expenditure under each element of cost is totaled and the total job cost is ascertained.
Batch Costing: Batch costing is a type of costing. Batch costing is done when production consists of a definite
number of articles or production involves limited repetition work. Batch costing is followed in industries like show
industry, biscuit factories, ball-point industry.
Economic Batch Quantity: EBQ is the batch size that minimizes both the setting up costs and the costs of carrying
inventory in stock over a period.
Economic Batch Quantity =
Where,
U= Annual usage in units, S= Setting up costs per Batch, l= Annual rate of interest, C= Unit cost of production.
Setting Up Costs: Setting up costs are fixed per batch, per unit cost will decrease with the increase in batch size and
per unit cost will increase with the decrease in batch size.
Carrying Costs: Carrying costs are costs that are incurred of holding inventory in stock over a period. These costs
may include costs of storage, interest on capital blocked in the large stock etc. It will increase with the increase in
the size of batch.
Exercises:
Exercise-1: The Information given below has been taken from the cost records of an engineering works in respect of
Job No.-101:
Materials: Tk. 4,010. Labor: Department-A: 60 hours @ Tk. 3 per hour; Department-B: 40 hours @ Tk. 2 per hour;
Department-C: 20 hours @ Tk. 5 per hour. The overhead expenses are as follows:
Variable: Department-A: Tk. 5,000 for 5,000 Labor Hours; Department-B: Tk. 3,000 for 1,500 Labor Hours;
Department-C: Tk. 2,000 for 500 Labor Hours. Fixed: Tk. 20,000 for 10,000 working hours.
Requirement: Calculate the cost of Job No.-101 and price for the job to give a profit of 25% on the selling price.
Job Cost Sheet
(Job No.-101)
Cost Components
Materials
Labor:
Department-A: 60 hours @ Tk. 3 Per Hour
Department-B: 40 hours @ Tk. 2 Per Hour
Department-C: 20 hours @ Tk. 5 Per Hour
Overhead Expenses:
Variable:
Department-A: [(Tk. 5,000 ÷ 5,000 Labor Hours) x 60 Hours]
Department-B: [(Tk. 3,000 ÷ 1,500 Labor Hours) x 40 Hours]
Department-C: [(Tk. 2,000 ÷ 500 Labor Hours) x 20 Hours]
Fixed: [(Tk. 20,000 ÷ 10,000 Hours) x (60 + 40 + 20 Hours)
Cost of the Job
Add: Profit 25% on Sales Price i.e. 33.33% on Cost
Selling Price
Amount (Tk.)
180
80
100
60
80
80
240
Amount (Tk.)
4,010
360
460
4,830
1,610
6,440
Exercise-2: In an enterprise, factory overheads are charged to jobs based on prime cost. From January-2024 the
management decided to charge overheads based on direct labor hours or percentage of direct wages. The following
figures are available in the monthly accounts of the enterprise.
Manufacturing overhead Tk. 50,000; Direct wages Tk. 25,000 Direct labor hours 50,000. In a particular month, the
following figures were available regarding two jobs:
BBA-Major in Accounting & Information Systems, Department of Business Administration, International Islamic University Chittagong
ACC-4807: Advanced Cost Accounting
Job, Batch, Contract Costing
Job No. 101
Job No. 201
Direct material
Tk. 150
Tk. 150
Direct wages
Tk. 20
Tk. 25
Direct labor
10 hours
8 hours
Required: Prepare job cost sheet based on direct wages percentage and direct labor hour rate.
1. Calculation based on direct wages percentage:
Factory Overhead Rate (Percentage of Direct Wages): = (Total Manufacturing Overhead ÷ Total Direct Wages) x
100 = (50,000 ÷ 25,000) x 100 = 200%
Job No. 101: Overhead Applied = Direct Wages x Overhead Rate = 20 x 200% = Tk. 40
Job No. 201: Overhead Applied = Direct Wages x Overhead Rate = 25 x 200% = Tk. 50
2. Calculation Based on Direct Labor Hour Rate:
Factory Overhead Rate per Direct Labor Hour:
Factory Overhead Rate Per Hour = Total Manufacturing Overhead ÷ Total Direct Labor Hours = (50,000 ÷ 50,000
Hours) = Tk. 1 Per Direct Labor Hour
Job No. 101: Overhead Applied = Direct Labor Hours x Overhead Rate per Hour = 10 x 1 = Tk. 10
Job No. 201: Overhead Applied = Direct Labor Hours x Overhead Rate per Hour = 8 x 1 = Tk. 8
Job Cost Sheet Preparation:
1. Based on Direct Wages Percentage:
Cost Components
Job No. 101 (Tk.) Job No. 201 (Tk.)
Direct Material
150
150
Direct Wages
20
25
Overhead Applied (200 % of Direct Wages)
40
50
Total Cost
210
225
2. Based on Direct Wages Percentage:
Cost Components
Direct Material
Direct Wages
Overhead Applied (Tk. 1 Per Hour)
Total Cost
Job No. 101 (Tk.)
150
20
10
180
Job No. 201 (Tk.)
150
25
8
183
Exercise-3: A company manufactures goods to customer's specification, on 31 December, cost records show the
following information in respect of three incomplete orders:
Job No.
B-12
D-23
E-O7
Direct Materials
15,000
21,000
29,000
Direct Labor
14,000
16,000
21,000
Factory Overhead
10,500
15,000
18,000
Direct Labor Hour
3,500
5,000
6,000
The jobs are completed during the next two months, Additional materials and labor hours required for completion of
the jobs are as follows:
Job No.
Direct Materials
Direct Labor Hour
B-12
5,000
1,500
D-23
3,000
2,000
E-O7
4,000
3,000
Factory overhead is charged on tire basis of direct labor hours. Calculate the cost of each job where profit is 20% on
the selling price.
1. Calculation of Labor Hour Rate:
i) Job No. B-12 = Direct Labor Cost ÷ Direct Labor Hour = (14,000 ÷ 3,500 Hours) = Tk. 4 Per Direct Labor Hour
ii) Job No. D-23 = Direct Labor Cost ÷ Direct Labor Hour = (16,000 ÷ 5,000 Hours) = Tk. 3.20 Per Direct Labor
Hour
iii) Job No. E-07 = Direct Labor Cost ÷ Direct Labor Hour = (21,000 ÷ 6,000 Hours) = Tk. 3.50 Per Direct Labor
Hour
2. Calculation of Total Direct Labor Cost:
i) Job No. B-12 = 1,500 Hours @ Tk. 4 = Tk. 6,000
Total= (14,000 + 6,000) = Tk. 20,000
BBA-Major in Accounting & Information Systems, Department of Business Administration, International Islamic University Chittagong
ACC-4807: Advanced Cost Accounting
Job, Batch, Contract Costing
ii) Job No. D-23 = 2,000 Hours @ Tk. 3.20 = Tk. 6,400
Total = (16,000 + 6,400) = Tk. 22,400
iii) Job No. E-07 = 3,000 Hours @ Tk. 3.50 = Tk. 10,500
Total = (11,000 + 10,500) = Tk. 31,500
3. Calculation of Total Factory Overhead:
i) Job No. B-12 = 1,500 Hours @ Tk. 3 = Tk. 4,500
Total = (10,500 + 4,500) = Tk. 15,000
ii) Job No. D-23 = 2,000 Hours @ Tk. 3 = Tk. 6,000
Total = (15,000 + 6,000) = Tk. 21,000
iii) Job No. E-07 = 3,000 Hours @ Tk. 3 = Tk. 9,000
Total = (18,000 + 9,000) = Tk. 27,000
Cost Components
Direct Material
Add: Additional Materials
Materials Used
Direct Labor
Prime Cost
Factory Overhead
Manufacturing Cost
Profit (20% on Sale i.e. 25% on Cost)
Selling Price
Job No. B-12 (Tk.)
15,000
5,000
20,000
20,000
40,000
15,000
55,000
13,750
68,750
Job No. D-23 (Tk.)
21,000
3,000
24,000
22,400
46,400
21,000
67,400
16,850
84,250
Job No. E-07 (Tk.)
29,000
4,000
33,000
31,500
64,500
27,000
91,500
22,875
114,375
Exercise-4: In Janata Corporation costs of completing a job were as follows:
Direct Materials 1,200 kg @ Tk. 15; Direct Labor 750 hours @ Tk. 4; Factory Overhead: Fixed Tk. 1,800; Variable
Overhead 80% of Direct Labor Cost.
The job was sold at Tk. 31,500.
The company must quote the price of a new job which requires 33.33% more materials and labor hours to complete.
The price of materials and the labor hour rate have increased to 20% and 25% respectively.
Required: What price the company should quote to earn the same percentage of profit in cost?
Statement of Job Cost
(For Old Job)
Cost Components
Materials (1,200 kg x Tk. 15)
Direct Labor (750 Hours x Tk. 4)
Amount (Tk.)
Prime Cost
Factory Overhead:
Variable (80% of 3,000)
Fixed
2,400
1,800
Cost of Goods Manufactured
Add: Profit
Selling Price
Amount (Tk.)
18,000
3,000
21,000
4,200
25,200
6,300
31,500
Workings:
i) New Labor Hours = [750 + (750 x 33.33%)] = 1,000 Hours
ii) Price of New Material Rate = Tk. 15 + (Tk. 15 x 20%) = Tk. 18
iii) New Labor Hour Rate = Tk. 4 + (Tk. 4 x 25%) = Tk. 5
iv) Materials Needs for New Job = 1,200 + (1,200 x 33.33%) = 1,600 kg
v) % of Profit Rate on Cost = [(6,300 ÷ 25,200) x 100] = 25%
BBA-Major in Accounting & Information Systems, Department of Business Administration, International Islamic University Chittagong
ACC-4807: Advanced Cost Accounting
Job, Batch, Contract Costing
Statement of Job Cost
(For New Job)
Cost Components
Materials (1,600 kg x Tk. 18)
Direct Labor (750 Hours x Tk. 4)
Amount (Tk.)
Prime Cost
Factory Overhead:
Variable (80% of 5,000)
Fixed
Amount (Tk.)
28,800
5,000
33,800
4,000
1,800
5,800
39,600
9,900
49,500
Cost of Goods Manufactured
Add: Profit (25% on Cost)
Selling Price
Exercise-5: Acme Ltd. uses two predetermined overhead rates for its products. Overheads are divided based on
labor functions and machine operations and separate rates are calculated for each of them. Some jobs depend mainly
on manual labor and some others largely on machine operations. For the year ended 31st December, during the year
the following estimates have been made:
i) Factory Overhead for Labor Functions: Tk. 204,000; ii) Factory Overhead for Machine Operations: Tk. 198,000;
iii) Direct Labor Cost: Tk. 240,000; iv) Machine Hours: 36,000
Actual data relating to two jobs are as follows:
Job No. 104
Tk. 23,100
Tk. 28,400
200
Direct Material
Direct Labor
Machine Hours
Job No. 105
Tk. 36,600
Tk. 2,400
3,000
Required: a) Predetermined overhead rates b) Cost of two jobs based on two overhead rates c) Cost of the two jobs
if a single overhead rate based on direct labor cost was used.
1) Predetermined Overhead Rates:
i) Factory Overhead Rates based on Direct Labor Cost = [(Tk. 204,000 ÷ Tk. 240,000) x 100] = 85%
ii) Factory Overhead Rates based on Machine Hours = [Tk. 198,000 ÷ 36,000 Machine Hours] = Tk. 5.5 Per
Machine Hour
2) Cost of two jobs based on two overhead rates:
Statement of Job Cost
For Job No. 104
Cost Components
Amount (Tk.) Amount (Tk.)
Direct Material
23,100
Direct Labor
28,400
Prime Cost
51,500
Factory Overhead:
Labor Function (85% of 28,400)
24,140
Machine Operation (200 Hours x Tk. 5.5 Per Hour)
1,100
25,240
Total Cost
76,740
Statement of Job Cost
For Job No. 105
Cost Components
Direct Material
Direct Labor
Prime Cost
Factory Overhead:
Labor Function (85% of 2,400)
Machine Operation (3,000 Hours x Tk. 5.5 Per Hour)
Amount (Tk.)
2,040
16,500
Total Cost
Amount (Tk.)
36,600
2,400
39,000
18,540
57,540
BBA-Major in Accounting & Information Systems, Department of Business Administration, International Islamic University Chittagong
ACC-4807: Advanced Cost Accounting
Job, Batch, Contract Costing
c) Calculation of Single Overhead Rate based on Direct Labor Cost = [{(Tk. 204,000 + 198,000) ÷ Tk. 240,000)} x
100] = 167.50%
Statement of Job Cost
For Job-104 and Job-105 in Single Overhead Rate
Cost Components
Job-104 (Tk.)
Job-105 (Tk.)
Direct Material
23,100
36,600
Direct Labor
28,400
2,400
Prime Cost
51,500
39,000
Factory Overhead: (167.50% of Direct Labor)
47,570
4,020
Total Cost
99,070
43,020
Exercise-6: From the following particulars calculate the cost of Job No.505 and price for the job to give a profit of
25% on the selling price.
Material: Tk. 6820
Wage and Variable Overheads Details are as follows:
Wage Details
Variable Overheads Detail
Department Total
Rate Per Hour (Tk.)
Department Total Cost (Tk.) Total Hour
Hours
X
60
3
X
5,000
5,000
Y
50
3
Y
4,000
2,000
Z
30
5
Z
2,000
500
The total fixed expenses amounted to Tk. 20,000 for 10,000 working hours. Calculate the cost of Job No. 505 and
the price for the job to give a profit of 25% on selling price.
Job Cost Sheet
(Job No.-505)
Cost Components
Materials
Labor:
Department-X: 60 hours @ Tk. 3 Per Hour
Department-Y: 50 hours @ Tk. 3 Per Hour
Department-Z: 30 hours @ Tk. 5 Per Hour
Amount (Tk.)
180
150
150
Prime Cost
Overhead Expenses:
Variable:
Department-X: [(Tk. 5,000 ÷ 5,000 Labor Hours) x 60 Hours]
Department-Y: [(Tk. 4,000 ÷ 2,000 Labor Hours) x 50 Hours]
Department-Z: [(Tk. 2,000 ÷ 500 Labor Hours) x 30 Hours]
Fixed: [(Tk. 20,000 ÷ 10,000 Hours) x (60 + 50 + 30 Hours)
Cost of the Job
Add: Profit 25% on Sales Price i.e. 33.33% on Cost
Selling Price
60
100
120
280
Amount (Tk.)
6,820
480
7,300
560
7,860
2,620
10,480
Exercise-7: ABC Limited manufactures ring binders which are embossed with the customers’ own logo. A
customer has ordered a batch of 600 binders. The following illustrates the cost for a typical batch of 100 binders.
Direct Material
Direct Labor
Machine Set Up
Design Artwork
Prime Cost
Amount (Tk.)
60
20
6
30
116
BBA-Major in Accounting & Information Systems, Department of Business Administration, International Islamic University Chittagong
ACC-4807: Advanced Cost Accounting
Job, Batch, Contract Costing
Direct employees are paid on a piecework basis. ABC Limited absorbs production overheads at a rate of 20% of
direct wages cost. 5% is added to the total production cost of each batch to allow for selling, distribution and
administration overheads. ABC Limited requires a profit margin of 25% of sales value.
The selling price for 600 binders (to the nearest penny) will be:
a) 756 b) 772.8 c) 806.4 d) 1,008
Calculation of Selling Price:
Prime Cost (Tk. 116 x 6)
Overheads (Tk. 20 x 6 x 20%)
Selling, Distribution and Administration Overheads (720 x 5%)
Total Cost
Selling Price [(Tk. 756x 100) ÷ 75]
Amount (Tk.)
696
24
720
36
756
1,008
Contract Costing
It is a special form of job costing and it is the most appropriate method to be adopted in such industries as building
and construction work, civil engineering, mechanical fabrication and ship building. In other words, it is a form of
specific order costing which applies where the work is undertaken to customer’s requirements and each order of
long duration as compared to job costing. It is also known as terminal costing. The official CIMA terminology
defines contract costing as “a form of specific order costing in which costs are attributed to individual contracts.”
Basic Features:
1. Each contract itself a cost unit.
2. Work is executed at the customer’s site.
3. The existence of subcontract.
4. Most of the expenses incurred upon the contracts are direct.
5. Cost control is very difficult in contract costing.
Types of contracts Generally there are three types of contracts:
1. Fixed Price Contracts: Under these contracts both parties agree to a fixed contract price.
2. Fixed Price Contract with Escalation clause.
3. Cost Plus Contract: Under this contract no fixed price could be settled for a contract.
Contract Account: A contract account is a nominal account in nature. It is prepared to find out the cost of the
contract and to know profit or loss made on the contract. A contractor may undertake several contracts at a time. For
each contract a separate account is opened. In the contract account all direct costs such as material, labour and other
direct expenses incurred during an accounting period are debited and the indirect expenses are apportioned on an
equitable basis. The differences between the two sides are known as Notional profit or notional loss.
Special Terms in Contract Account:
1. Work in Progress: It is the unfinished contract at the end of the accounting period, and it includes the amount of
work certified and amount of work uncertified. Work in progress is an asset, shown in the balance sheet by
deducting there from any advance received from the contractee.
2. Work Certified: The sales value of work completed as certified by the architect is known as ‘work certified’. In
the case of contracts of long duration, the amount payable by the customer to the contractor is based on the sales
value of work done as certified by the architect. At the end of the financial year, the total sales value of work done
and certified by the architect is credited to the contract account.
3. Work Uncertified: It means work which has been carried out by the contractor but has not been certified by the
architect. Sometimes, work which is complete remains uncertified at the end of the financial year. The reasons for
the same may be a. Work not sufficient to be certified b. Work has not reached the stipulated stage to qualify for
certification. It is always valued at cost and credited to the contract account.
4. Retention Money: Regardless of the amount of work certified, the contractor is paid a specified percentage of the
same and the balance is held or retained by the contractee. This is because the contractee must safeguard himself
against any contingency arising from the non-fulfillment of the terms of the contract by the contractor. The unpaid
balance of work certified, or the amount held back or retained by the contractee is known as ‘retention money’.
BBA-Major in Accounting & Information Systems, Department of Business Administration, International Islamic University Chittagong
ACC-4807: Advanced Cost Accounting
Job, Batch, Contract Costing
5. Subcontract: Sometimes the contractor enters contracts with another contractor to give a portion of work
undertaken by him. In such cases the work performed by the subcontractor s forms a direct charge to the contract
concerned. Subcontract costs will be shown on the debit side of the contract account.
6. Escalation clause: This is the clause which is provided in the contract to cover up any increase in the price of the
contract due to increase in the prices of raw material or labour or in the utilization of any other factors of production.
If material and labour utilization exceed a particular limit, the customer agrees to bear the additional cost occasioned
by excessive utilization. Here, the contractor must satisfy the customer that excessive utilization is not the result of
decreased efficiency.
Specimen Form of Contract Account (Unfinished Contract)
Amount (Tk.)
Amount (Tk.)
To Materials
xxx By Work-in-Progress:
To Labour
xxx Work Certified
xxx
To Plant
xxx Work Uncertified
xxx
xxx
To Overheads
xxx By Material Returned
xxx
To Cost of Subcontracts
xxx By Plant
xxx
To Notional Profit C/D (B/F)
xxx Less: Depreciation
xx
xxx
By Material Lying at Site
xxx
xxx
xxx
To Profit and Loss A/C
xxx By Notional Profit B/D
xxx
To WIP (B/F)
xxx
xxx
xxx
Treatment of Plant and Machinery: One of the distinguishing features of a contract is the use of special plant and
machinery. The cost of these is capital expenditure, but the usage of these should be reflected in the form of
depreciation. There are two distinct methods of charging depreciation.
1. At the time of issue of plant to contract the contract account is debited with the full value of the plant. At the end
of the period the contract account is credited with a depreciated value. This method is used when plant and
machinery is used at the contract site for a long period.
2. In the second method, the contract account is debited with an hourly rate of depreciation for the number of hours
the plant is used on the contract. A cost centre is set up for each machine. An estimate is made is made of the cost
such as maintenance, depreciation, driver’s wage etc. to be incurred. The total of this cost is divided by the number
of hours that the machine is expected to be used.
Profit on Incomplete Contract: In the case of a small contract extending over the financial period, profit or loss on
the same may be ascertained by crediting it with the contract price due by the contractee. This procedure cannot be
adopted in the case of contracts extending beyond the accounting period and taking a long time for completion. If
there is any profit from the incomplete contract, it cannot be taken as actual profit. The profit from the incomplete
contract is called notional profit. For determining the amount of profit to be transferred to profit and loss account
and making provision for future contingencies, the following guidelines may be kept in mind.
1. When the work has not reasonably advanced (¼ or less than ¼): No profit should be taken to the credit of p/L
account in the case of contracts which have just commenced, and a small portion of the work is complete.
2. Where the work is complete more than ¼ but less than ½ of contract price: In this case 1/3 of the notional profit as
reduced by the percentage of cash received may be credited to profit and loss account. The usual formula is:
1
Cash Received
Notional Profit x ------ x ----------------------3
Work Certified
The balance of notional profit shall be kept as reserve till the completion.
3. If the contract completed is more than ½ but less than 90%: Here 2/3 of the notional profit should be taken to
profit and loss account.
2
Cash Received
Notional Profit x ------ x ----------------------3
Work Certified
The balance of notional profit shall be transferred to Work in progress as reserve. It is to be noted that to find out
how much portion of contract is completed, work certified should be compared with contract price.
4. If the contract is nearing completion: Here, estimated profit may be ascertained by deducting the total cost of the
contract to date plus estimated additional expenses to complete the contract, from the contract price. It is calculated
by using the following formula:
BBA-Major in Accounting & Information Systems, Department of Business Administration, International Islamic University Chittagong
ACC-4807: Advanced Cost Accounting
Job, Batch, Contract Costing
Cash Received
Estimated Profit x ----------------------Work Certified
The loss on an incomplete contract should be fully transferred to the profit and loss account.
Exercises:
Exercise-1: The following was the expenditure on a contract for Tk. 600,000:
Amount (Tk.)
Material
120,000
Wages
164,000
Plant
20,000
Overheads
8,600
The cash received on account of the contract was Tk. 240,000, 80% of the work certified. The Value of material in
hand was Tk. 10,000. The plant has undergone 20% depreciation.
To Materials
To Wages
To Plant
To Overheads
To Notional Profit C/D (B/F)
To Profit and Loss A/C
To Balance C/D
Contract Account
Amount (Tk.)
120,000 By Material in Hand
164,000 By Plant in Hand
20,000 By Work Certified [(240,000 x 100) ÷ 80]
8,600
13,400
326,000
7,147 By Notional Profit B/D
6,253
13,400
Amount (Tk.)
10,000
16,000
300,000
326,000
13,400
13,400
Exercise-2: XY Ltd signed a contract, the following was the expenditure on a contract for Tk. 600,000.
Amount (Tk.)
Materials issued to contract
102,000
Plant issued for contract
30,000
Wages
162,000
Other expenses
10,000
Cash received on account of contract up to 31st March 2024 amounted to Tk. 256,000 being 80% of work certified.
Of the plant and material charged to the contract plant costing Tk. 3,000 and material costing Tk. 4000 were lost. On
1st March 2024, Plant which cost Rs. 2,000 was returned to the store, the cost of work done but not certified was Tk.
3,000 and material costing Tk. 2,500 were in hand on site. Provide 10% depreciation on plant, reserve 1/3 of profit
received and prepare contract account from the above particulars.
Contract Account
Amount (Tk.)
Amount (Tk.)
To Materials
102,000 By Work-in-Progress:
To Plant
30,000 By Work Certified [(256,000 x 100) ÷ 80]
320,000
To Wages
162,000 By Work Uncertified
3,000
323,000
To Other Expenses
10,000 By Profit and Loss Account:
To Notional Profit C/D (B/F)
52,800 Plant Lost
3,000
Material Lost
4,000
7,000
By Plant Returned
2,000
Less: Depreciation
200
1,800
By Material in Hand
2,500
By Material on Site (30,000 – 3,000 – 2,000)
25,000
Less: Depreciation
2,500
22,500
356,800
356,800
To Profit and Loss A/C
By Notional Profit B/D
52,800
[(52,800 x 2 x 80) ÷ (100 x 3)
28,160
To Reserve (B/F)
24,640
52,800
52,800
BBA-Major in Accounting & Information Systems, Department of Business Administration, International Islamic University Chittagong
ACC-4807: Advanced Cost Accounting
To Contract Account
Job, Batch, Contract Costing
Work-in-Progress Account
Amount (Tk.)
323,000 By Contract Account Reserve
By Balance C/D
323,000
Amount (Tk.)
24,640
298,360
323,000
Exercise-3: Mr. Nazmul has undertaken several contracts works. He maintains a separate record for each contract.
From the records for the year ending 31-12-23, Prepare contract account for Contract No. 50 and find the amount
transferred to profit and loss account.
Amount (Tk.)
Direct purchase of material
180,000
Material issued from stores
50,000
Wages
244,000
Direct expenses
24,000
Machinery purchased
160,000
Establishment charges
54,000
The contract price was Tk. 1,500,000. Cash received up to 31-12-2023 was Tk. 600,000 which is 80% of work
certified. Material at site Tk. 16,000. Depreciation for Machine Tk. 16,000.
Contract Account
Amount (Tk.)
Amount (Tk.)
To Materials Direct Purchase
180,000 By Material at Site
16,000
To Material issued from Store
50,000 By Machinery on Hand (160,000 – 16,000)
144,000
To Wages
244,000 By Work Certified [(600,000 x 100) ÷ 80]
750,000
To Direct Expenses
24,000
To Machinery Purchased
160,000
To Establishment
54,000
To Notional Profit C/D (B/F)
198,000
910,000
910,000
To Profit and Loss A/C
By Notional Profit B/D
198,000
[(198,000 x 2 x 80) ÷ (100 x 3)
105,600
To Work in Progress Account
92,400
198,000
198,000
BBA-Major in Accounting & Information Systems, Department of Business Administration, International Islamic University Chittagong