Meghe Group of Institutions
Department
for
Technology Enhanced Learning
1
DTEL
MBA Department
II SEM
Cost &Management Accounting
UNIT- III
Contract and Operating Costing
2
SYLLABUS
1.1Silent clauses and accounting features of Contract
costing,
1.2 Retention money clause and Escalation clause,
1.3 Profit of uncompleted Contract,
1.4 WIP in balance sheet.
1.5 Features of operating costing: Transport costing
(Standard charge, running and operating cost,
maintenance charges and log sheet), Canteen, Hospital
and hotels costing.
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LEARNING OBJECTIVES
1.Silent clauses and accounting features of
Contract costing,
2. Retention money clause and Escalation
clause,
3. Profit of uncompleted Contract,
4. WIP in balance sheet.
5.Features of operating costing: Transport
costing (Standard charge, running and
operating cost, maintenance charges and log
sheet), Canteen, Hospital and hotels costing.
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Contract Costing
• Meaning:
• Contract Costing is that form of specific order
costing under which each contract is treated as
cost unit and costs are accumulated and
ascertained separately for each contract.
• A separate Contract Account is prepared for each
contract and is assigned a certain number by which
the contract is identified.
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Features of Contract Costing
a. Each contract is treated as unit cost
b. All
costs
are
accumulated
and
ascertained for each contract
c. A separate contract A/c is prepared
d. Work on Contract is executed at the site
of the contract
e. Direct cost usually constitute a major
portion of the total cost of the contract
f. Indirect costs usually constitute a small
portion of the total cost of the contract
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Procedure for contract Costing
1. Separate Contract Account:
2.Accounting for Material
a. For Materials purchased for a contract
Contract A/C debited and Stores supplier’s
A/c/Cash/bank A/c is credited
b. For Materials issued from stores
Contract A/C debited & Stores Control A/c
credited
c. For Material returned to stores
Stores Control A/c debited & Contract A/c is
credited
d. For Materials transferred to other contract
Transferee Contract A/c is debited &
Transferor Contract A/c is credited
e. For sale of Materials
Cash/Bank A/c is debited and Contract A/c is
credited
f. For Abnormal Loss of Materials
Costing P&L A/c debited and Contract A/C is
credited
g. For materials supplied by the contractee
without affecting the contract price
Such Material should not be charged to
Contract A/c
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3. Accounting for Labour Cost
Wages paid to workers engaged on a
particular contract
Such wages are charged directly to
respective contract A/c
Wages paid to workers who move from
one contract to another
Such wages are distributed over
contracts on the basis of time spent by
workers on each contract.
4. Accounting for Direct Expenses
Direct expenses (if any) incurred are directly
charged to the respective contract.
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• 5. Accounting for Charge for Use of Pant & machinery
a. Where a plant is specifically purchased The contract A/c is debited with the cost
for the contract
of the plant at time of purchase and is
credited with the depreciated value of
the plant at the end of accounting period
b. Where a plant is issued from stores for
a short period
The Contract A/c is debited with the
amount of depreciation for the period of
use.
c. Where a plant is taken on hire
The contract A/c is debited with the
amount of hire charges.
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• 6. Accounting for indirect expenses or
overheads
• Are distributed over different contracts on some
suitable basis like percentage of materials cost,
percentage of labour cost etc.
• 7. Accounting for Subcontract Cost:
• Sub-contract cost are also debited to respective
contract A/c
• 8. Accounting for Extra Work:
• Debited to contract A/c & the extra amount should
be added to contract price.
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Work Certified
Meaning
Work Certified is that portion of the work completed which has been
certified/approved by the contractee’s architect or surveyor. It is
valued in terms of contract price.
Accounting
Treatment
The value of work certified is debited to Contractee’s Account or Workin-progress Account and is credited to the Contract Account. Its value is
transferred to the debit of Contract Account at the beginning of the
next accounting period.
Computatio
n
The Value of work certified is calculated as follows:
Value of Work Certified = Contract Price X Work Certified as % of
Contract price
Or
= Cash Received/Cash Received as % of Work Certified.
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Numerical Calculations:
• Calculate the value of Work Certified in each of
the following cases:
• A. Contract Price Rs. 1,00,000, Work Certified 60%
B. Cash Received Rs. 4,80,000 being 80% of Work
Certified.
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Retention Money
Meaning
Retention Money is that Portion of value of work certified which is
retained by the contractee as security for any defective work which
may be discovered later within the guarantee period.
Purpose
It purpose is to provide a safeguard against the risk of loss due to
faulty workmanship. If any deficiency or defect is noticed in the
work, it is to be rectified by the contractor before the release of the
retention money.
When Paid
Retention money is generally paid after the expiry of period
specified in the contract when it is ensured that there is no fault in
the work carried out by the contractor.
Computation
It is calculated as follows:
Retention money = Value of Work Certified – Cash Received.
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Cash Received
Meaning
Cash received is that portion of the value of work certified which is
paid by the contractee. It is usually expressed as % of Work Certified.
Computation
Calculated by the following formula:
Cash Received = Value of Work Certified – Retention Money
or
= Value of Work Certified X Cash Received as % of W.C.
or
= Contract Price X % of W.C. X % of Cash Received.
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Numerical Calculation
Calculate the amount of payment received in each
of the following cases:
a. Work Certified Rs. 3,00,000, Payment received
from contractee 80%
b. Contract Price Rs. 5,00,000, Work Certified 60%,
payment received from contractee 80%.
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Work Uncertified
Meaning
Work uncertified is that portion of the work completed which has
not been certified/approved by the contractees architect or
surveyor. It is valued at cost.
Accounting
Treatment
The cost of work uncertified is debited to work-in-progress Account and is
credited to Contract Account.
It is transferred to the debit of Contract Account at the beginning of the
next accounting period.
Computation
Calculated as follows:
Cost of Work Uncertified
= Total Cost incurred till date- Cost of Work Certified
or
= Total Cost incurred till date X % of Work uncertified
% of total word done till date
Unit 3
Numerical Calculation
• Calculate the work Uncertified in each of the
following cases:
• A. Total Cost incurred to date Rs. 1,20,000, cost of
Work Certified Rs. 1,00,000.
• B. Total Costs incurred to date Rs. 1,20,000 to
complete 60% of the contract work. However,
architect gave certificate only for 50% of the
contract price.
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Notional Profit
Meaning
Notional profit is the difference between the value of work-in-progress
certified and the cost of work-in-progress certified.
Computation
It is computed by following formula:
Notional profit
= Value of Work certified-Cost of Work Certified
or
= Value of Work certified – (Total cost incurred till date – Cost of Work
uncertified)
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Account for Profit of Incomplete
Contract
Statement showing the amount of Profit showing
the amount of Profit to be credited to P&L A/c
Value of Work Certified
Amount of Profit to be credited to P & l
A/c.
1. If less than 25% of the contract price
No Profit is taken into account. The entire
amount is treated as reserve
2. If equal to or more than 25 % but less than
50% of the contract price
1/3 x Notional profit x Cash Received
Work Certified
3.If equal to or more than 50% but less than
90% of the contract price
2/3 x Notional profit x Cash Received
Work Certified
4. If equal to or more than 90% of the
contract price
1. Estimated total profit x Cash Received
Contract price
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2. Estimated total profit x
Cost of work to date x Cash received
Estimated total cost
Work certified
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Format of Contract A/C
articulars
Rs.
O Materials issued to site
------ By Material at Site
------
Wages ( Paid + o/s – Prepaid)
------ By Plant at Site
------
Direct Expenses ( Paid + o/s – Prepaid)
------ By Store Ledger A/c ( Returns)
------
------ By Bank A/c ( Sale of Materials)
------
------ By Costing P&L A/c (Loss on Sale)
------
-
------
O Plant
Office & Adm exp ( + o/s – Prepaid)
Particulars
By cost of Contract C/d
------
Rs.
------
O Cost of Contract b/d
------
By WIP
O Notional Profit c/d
------ Value of Work Certified
------
TO P& L A/c
---------
TO Reserve A/c
---------
By Notional profit b/d
---------
---------
---------
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Format of Balance Sheet
Liabilities
Amt Assets
Capital
Land & Building - Depreciation
P & L A/c
Plant & Equipment - Depreciation
Outstanding Expenses
Materials
Amt
Work in Progress
Value of Work Certified
Cost of work uncertified
Less: Contractee’s Cr balance
Less : Transfer t o Reserve
Cash & Bank bal
Prepaid Expenses
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• Mr. X. Undertook a Contract No. 501 for Rs. 5,00,000
on 1st July 2011. On 31st March 2012 when the
accounts were closed, the following information was
available.
Materials issued to site
Rs. 55,000
Direct expenses paid
Rs.
6,000
Site office Cost
Rs.
10,000
Plant
Rs. 2,00,000
Direct Expenses Prepaid at the end
Rs.1,000
Cost of Work Uncertified
Rs 20,000
Wages Paid
Rs. 18,000
General overheads
25% of Wages
Cost of Sub-contracts
Rs. 15,000
Wages accrued at the end
Rs. 2,000
Materials at site at the end
Rs. 5,000
Materials issued to site
Rs. 55,000
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• Cash received Rs. 2,00,000 being 80% of work
certified. The plant was installed on the
respective date of the contract and depreciation
to be provided at 10% p.a.
• Prepare Contract Account, Contractees A/c and
show the relevant items relating to contract in
the Contractor’s Balance Sheet.
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• 2. Following expenses were incurred by a contractor
on a contract which he started on 1st January 2012.
Particulars
Rs.
Materials
40,000
Wages
50,000
Other Expenses
15,000
Plant at Cost
50,000
Work Certified
1,20,000
Work uncertified
60,000
Materials on hand (31st Dec)
11,000
Plant value at close
43,000
Cash received from Contractee
1,00,000
Materials returned to stores
2,000
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• Prepare Contract Account and Work-inprogress, assuming that the contract price was
Rs. 3,50,000. How will Work-in-progress
appear in the Balance Sheet of the
Contractor?
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Escalation Clause
Meaning
Escalation clause in a contract means, if during the period of
execution of a contract, the prices of materials, rates of labour
etc. rise beyond a specified limit, the contract price will be
increased by specified rate of amount.
How to calculate
escalation claim
Escalation claim so far rates are concerned may be calculated as
follows:
For Material = Standard Quantity x ( Actual Price – Standard Price)
For Labour = Standard Labour x ( Actual Rate – Standard Rate)
Increase in cost
not covered by
escalation clause
Escalation clause does not cover that part of increase in cost which is
caused due to inefficiency or wrong estimation.
Meaning of Deescalation clause
Conversely, de-escalation clause applies for the downward
adjustment of the contract price in case the price of materials, rates
of labour etc. fall beyond a specified limit.
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• 3. The escalation clause of a long term contract
stipulates the following quantities and rates of
materials of A, B and C and following number
of labour hours of X, Y and Z and their rates of
pay. The following information are given
below:
•
Standard
Actual
Materials
Qty Tonnes
Price Rs.
Qty Tonnes
Price Rs
A
500
50
750
45
B
1,000
30
900
35
C
20
1,000
21
1,010
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•
•
Standard
Labour
Hours
Actual
X
4,800
Hourly Rate
(Rs)
2.00
Y
2,400
1.00
3,000
1.50
Z
9,600
1.50
13,000
1.50
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Hours
4,500
Hourly Rate
(Rs)
2.25
30
• Deluxe Ltd. Undertook a contract for Rs.
5,00,000 on 1st July, 2011. On 30th June 2012
when the accounts were closed, the following
details about the contract were gathered:
• Material purchased Rs. 1,00,000, Wages paid
Rs. 45,000, General Expenses Rs. 10,000, Plant
purchased Rs. 50,000, Materials on Hand
30/06/2012 Rs. 25,000, Wages Accrued
30/06/2012 Rs. 5,000, Work Certified Rs.
2,00,000, Cash Received Rs. 1,50,000, Work
Uncertified Rs. 15,000, Depreciation of Plant
Rs. 5,000.
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• The above contract contained an escalator
clause which read as follows: “In the event of
prices of materials and rates of wages increase
by more than 5%, the contract price would be
increased accordingly by 25% of rise in the cost
of materials and wages beyond 5% in each
case.”
• It was found that since the date of signing, the
agreement, the prices of materials and wages
rates increased by 25%. The value of the work
certified does not take into account the effect of
the above clause.
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Features of operating costing
•
Services rendered to customers are of unique
and standardized type.
•
Large proportion of total capital is invested in
fixed assets and comparatively less working
capital is required.
•
Scale of operations considerable affect the
cost per unit of services rendered for ex. fixed
cost like insurance per passenger will be lower
if buses run capacity packed.
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Transport costing
• Transport costing is the method of ascertaining
the cost of providing service by a transport
undertaking. This method can be used for
determining the cost of services rendered by:
• A transport company carrying goods;
• A transport company carrying passengers;&
• An organization using a fleet of vehicles for
distribution of materials & finished products.
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Canteen costing
• Most factory/office canteens are either fully or
partly subsidized. Usually, the supervisor who is
accountable to the personnel manager or to the
works manager runs the canteen.
• The canteen normally provides main meals,
snacks & tea.
• .
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Hospital costing
• Operating costing system is used in ascertaining
the cost of a hospital.
• Hospital costing may relate to ascertaining the
cost of medical services rendering by a
dispensary belonging to a factory or a hospital, or
a nursing home owned by government or private
doctors.
• The main objectives of hospital costing is to
ascertain the cost of rendering service per patient
per day.
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Hotels costing
• Hotels
and
lodges,
providing
daily
accommodation facility to general public, have
mushroomed all over the country due to the
impetus provided by modern civilization to ‘travel’
both on personal and commercial work.
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SUMMARY
 Salient clauses in contract costing.
 Retention money clause
 Escalation clause
 Profit of uncompleted contract
 WIP in balance sheet
 Features of operating costing
 Canteen costing ,hospital costing ,hotel costing
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Citations/References
Wikipedia.Com
Cost & Management Accounting By M.N.
Arora.
 Cost Accounting By R.S.N. Pillai, V.
Bagavathi.
Cost Accounting By Dr.P.C. Tulsian.
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Thank You
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