Chapter

CONTRA
CT COSTING
1

CHAP
TER OUTLINE
Introduction, Contract and Job Costing — Distinction; Contract Costing Procedure, Special
Pointsin Contract Costing,
Profiton Incomplete
Contracts, Escalation
Clause,Cost-plus
Contracts, Problems and Solutions, Examination Questions.

Introduction
Contract costing, also known as terminal costing, is a variant of job
Contract costingis
costing. Contract means a big job in which work is done at site applicable
and not in:
● Building
in factory premises. The cost of each contract is ascertained. Thus in thisconstruction
method of costing, each contract is a cost unit and an account is● opened
Roadconstruction
for each contract in the books of contractor to ascertain profit/loss thereon.
● Bridge construction
● Ship building,etc.
Features ofContract Costing
Contractcostingusuallyshowsthe followingfeatures:.
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 as a cost unit.
5. A separate contract account is prepared for each contract in the books of
contractor to ascertain profit or loss on each contract.
6. Most of the materials are specially purchased for each contract. These will,
therefore, be charged direct from the supplier’s invoices. Any materials drawn
from the store are charged to contract on the basis of material requisition notes.
7. Nearly all labour cost will be direct.

1
2 ADVANCED COSTING AND AUDITING

8. Most expenses (e.g., electricity, telephone, insurance, etc.) are also direct.
9. Specialist subcontractors may be employed for say, electrical fittings, welding
work, glass work, etc.
10. Plant and equipment may be purchased for the contract or may be hired for
the duration of the contract.
11. Payments by the customer (contractee) are made at various stages of
completion of the contract based on architect’s certificate for the completed
stage. An amount, known as retention money, is withheld by the contractee as
per agreed terms.
12. Penalties may be incurred by the contractor for failing to complete the work
within the agreed period.
Contract Costing and Job Costing — Distinction
Main points of distinction between contract costing and job costing are as follows:
1. Contract is generally big while job is small. It is well said, “a job is a small
contract and a contract is a big job.”
2. The number of jobs undertaken at a time are usually large as compared to
number of contracts because contracts are generally much bigger in size.
3. In contract costing most of the costs are chargeable direct to contract accounts.
Under job costing, direct allocation to such an extent is not possible.
4. Allocation and apportionment of overhead costs is simpler in contract costing as
compared to job costing.
5. Jobs are usually carried out in factory premises while contract work is done at
site.
Contract Costing Procedure
The basic procedure for costing of contracts is as follows:
1. Contract account. Each contract is allotted a distinct number and a separate
account is opened for each contract.
2. 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:
(i) Materials, (ii) Labour and supervision, (iii) Direct expenses, (iv) Depreciation of plant
and machinery, (v) Subcontract costs, etc.
3. 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 materials, or wages, etc. Overheads are normally restricted to
head office and storage costs.
 CONTRACT COSTING 3

4. Transfer of materials or plant. When materials, plant or other items are

transferred from the contract, the contract account is credited by that amount.
5. 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.
6. 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. This is discussed in detail later in this chapter.
SPECIAL POINTS IN CONTRACT COSTING
Some of the important points in contract costing are now discussed:
Cost of Materials
Materials include (i) materials specifically purchased for the contract; (ii) materials
issued from store against material requisition notes. The cost of both these types of
materials is debited to the contract account.
Materials returned to store. Whenever materials are issued in excess of
requirements, as for instance, cement, sand, pipes, bricks, etc., these are later returned to
the store accompanied by a Material Return Note which gives the details of the material
returned. Such returned materials are credited to contract account.
Materials at site. At the end of each accounting period, value of materials lying
unused at site is credited to contract account and is carried forward for charging against
the next period. Cost of Labour
All wages of workers engaged on a particular contract are charged direct to the
contract irrespective of the type of work they perform. When several contracts are running
at different locations, payroll is normally sectionalised so as to have separate payroll for
each contract. Difficulties in costing may be encountered when some workers may have to
move from one site to another when a number of small contracts are undertaken. In such
situation, it becomes necessary to provide time sheets from which allocations can be
made. In order to control labour utilisation and prevent fraud in the payment of wages,
surprise visits by head office personnel will be necessary.
Plant Depreciation
There are two different methods of dealing with depreciation of plant in contract account:
(a) Contract account is debited with the cost of the plant installed. At the end
of the year or when the plant is no longer required, the plant is revalued and contract
account is credited with this revalued or depreciated figure. In case plant is sold on the
4 ADVANCED COSTING AND AUDITING

completion of the contract, the contract account is credited with its sale proceeds. The net
effect of the above debit and credit will be that the contract account will stand debited
with the amount of depreciation which is the difference between the value of plant debited
and value of plant credited. The method is generally used on long contracts which extend
over more than one year because depreciated value of the plant is credited to the contract
account and brought down as an opening balance in the next period.
(b) Alternatively, contract account is simply debited with the amount of
depreciation. It is usual to use this method when plant is sent to contract only for a short
period. For example, mobile crane or bulldozer used in a contract may be charged on this
basis.
However, when a plant is hired for a contract, a charge for the hire of the plant is
debited to the contract as a direct expense.
Subcontract Costs
Work of specialised character, for which facilities are not internally available, is
offered to a subcontractor. For example, steel work, glass work, painting, etc., is usually
carried out by the subcontractors who are accountable to the main contractor. The cost of
such work is charged to the contract account.
Payment based on Architect’s Certificate
In case the contract is small, full payment is usually made on the completion of the
contract. But in case of large contracts, it may take more than one year to complete. In
such a case, if no payment is received until the completion of the contract, the financial
resources of the contractor could surely become strained. Therefore, a system of progress
payments is agreed by parties. In this system, part payments of the contract amount are
paid from time to time on the basis of certificate issued by the architects (acting for the
contractee), certifying the value of the work satisfactorily completed. Such payments
received by the contractor are usually credited to the personal account of the contractee. It
should be noted that such payments are not entered in the Contract Account.
Work-in-progress — Work Certified and Uncertified
When the contract is not completed till the end of the accounting year, the architect is
required to value the work-in-progress. Such work-in-progress is classified into work
certified and work uncertified.
Work Certified. This is that part of the work-in-progress which has been approved
by the contractee’s architect or engineer for payment. Work certified is valued at contract
price (i.e , selling price), and includes an element of profit.
Work Uncertified. This is that part of the work-in-progress which is not approved
by the architect or engineer. This is valued at cost and thus does not include an element of
profit.
 CONTRACT COSTING 5

Both work certified and uncertified appear on the credit side of the contract account
and also on the assets side of the balance sheet.
Retention Money and Cash Ratio
It is usual practice not to pay the full amount of work certified. The contractee may
pay a fixed percentage, say 80% or 90% of the work certified, depending upon the terms
of the contract. This is known as Cash Ratio. The balance amount not paid is known as
Retention Money. For example, if cash ratio is 75%, the retention money will be
remaining 25%. This retention money is a type of security for any defective work which
may be found in the contract later on. This also works as a deterrent for the contractor to
leave the contract incomplete, if he finds the contract unprofitable. The retention money
may also be adjusted against penalties that become due if the contract is not completed
within the stipulated time as per the terms of the agreement.
Extra Work
Sometimes the contractor is required to do some extra work like additions or
alterations in the work originally done as per agreement. The contractor will charge extra
money for such extra work. The cost of such extra work is debited to the contract account
and extra price realised is credited to the contract account.
PROFIT ON INCOMPLETE CONTRACTS
Contracts which are started and finished during the same financial year create no
accounting problems. But in case of those contracts which take more than one year to
complete, a problem arises whether profit on such contracts should be worked out only on
the completion of the contract or at the end of each financial year on the partly completed
work. If profit is computed only on the completion of the contract, profit will be high in
the year of completion of the contract, whereas in other years of working on contract,
profit will be nil. This would result not only in distorted profit pattern but also higher tax
liability because income tax at higher rates may have to be paid. Therefore, when
contracts extend beyond a year, it becomes necessary to take into account the profit
earned (or loss incurred) on the work performed during each year. This helps in avoiding
distortion of the year-to-year profit trend of the business. There are two aspects of profit
computation:
6 ADVANCED COSTING AND AUDITING

(a) Computation
of notionalprofitor estimatedprofit.
(b) Computation of the portion of such profit to be transferred to Profit and Loss Account.
NotionalProfit
NotionalprofitIs the differencebetweenthe valueof work-in-progresscertifiedand the
cost of suchwork-in-progress certified.It is computed
as follows(Figuresare assumed):
`
Valueof workcertified 20,00,000
Add: Costof worknot yet certified 1,50,000
21,50,000
Less:Costof workto date 19,00,000
NotionalProfit 2,50,000
If in any year, cost of work done exceeds the value of work certified and uncertified, the
resultwillbe a notionalloss.
Estimated
Profit
Estimated profit represents the excess of the contract price over the estimated total
cost of the contract. It is computed as follows (Figures are assumed):
`
Contract Price 30 ,
00,000
Less: Total cost already incurred 21 ,
00,000
9 , 00,000
Less: Estimated additional costs to complete the contract 3 , 50,000
Estimated Profit 5 , 50,000

Portion of Notional Profit or Estimated profit to be Transferred to Profit and Loss

Account
The portion of the notional or estimated profit to be transferred to P&L Account
depends upon the stage of completion of the contract i.e., ratio of work-in-progress
certified to total contract work. For this purpose work-in-progress uncertified is not
considered. Prudence requires that the total notional profit should not be transferred to
P&L Account but a portion of it should be withheld as a reserve to meet any unforeseen
future expenses or contingencies.
Rules. There are no hard and fast rules in this regard. However, the following
general rules may be followed :
1. When work-in-progress certified is less than 1/4 of the contract price, no profit is
transferred to Profit and Loss Account. This is based on the principle that no profit should
be taken into account unless the contract has reasonably advanced.
 CONTRACT COSTING 7

2. When work-in-progress certified is 1/4 or more but less than 1/2 of the contract
price, then generally 1/3 of the profit is transferred to Profit and Loss Account. The
balance amount is treated as reserve. Thus, profit to be transferred to Profit and Loss
Account is computed by the following formula:

Transfer to P&L A/c = Notional profit ×

Alternatively, a more common practice is to further reduce this amount by the cash

ratio. Transfer to P&L A/c = Notional profit × 13 × WorkCash receivedcertified

3. When work certified is 1/2 or more but less than 9/10 of the contract price, (i.e.,
50% to 90%), then the profit to be transferred 2to P & L Account is computed as follows:
3

Transfer to P&L A/c = Notional profit ×

Here also a more common practice is to further reduce this amount by cash ratio.
This is shown below :
2 Cash received
Transfer to P&L A/c = Notional profit × ×
3 Workcertified
4. When contract is near completion then the estimated profit should be calculated on
the whole contract. The proportion of estimated profit to be transferred to Profit and Loss
Account is computed by any one of the following formulas:

Work certified
(a) Estimated profit ×
Contract price

Work certifiedCash received

(b) Estimated profit × ×

Contract price Work certified

Cost of work to date

(c) Estimated profit ×

Estimated total cost of work

Cost of work to date Cash received

8 ADVANCED COSTING AND AUDITING

(d) Estimated profit × ×

Estimated total cost of work Work certified

5. Loss on Uncompleted Contracts. In the event of a loss on uncompleted contracts,

this should be transferred in full to the Profit and Loss Account, whatever be the stage of
completion of the contract.
ESCALATION CLAUSE
Contracts generally take long time to complete and in this period there may be
changes in prices. Escalation clause is often provided in contracts to cover any likely
changes in the price or utilisation of materials and labour. Thus, a contractor is entitled to
suitably enchance the contract price if the cost rises beyond a given percentage. The
object of this clause is to safeguard the interest of the contractor against unfavourable
changes in cost. The escalation clause is of particular importance where prices of material
and labour are anticipated to increase or where quantity of material and/or labour time
cannot be accurately estimated.
Just as an escalation clause safeguards the interest of the contractor by upward
revision of the contract price, a de-escalation clause may be inserted to look after the
interest of the contractee by providing to downward revision of the contract price in the
event of cost going down beyond an agreed level.
COST-PLUS CONTRACTS
Cost-plus contract is a contract in which the contract price is ascertained by adding a
specified amount or percentage of profit to the costs allowed in the contract. This type of
contract terms are agreed upon in those cases where it is not possible to compute the cost
in advance with a reasonable degree of accuracy due to unstable conditions of market
prices, labour rates, etc. The contractee undertakes to reimburse the actual cost of contract
plus a stipulated profit. The profit to be added to cost may be either a fixed amount or a
specified percentage of cost. The items of cost to be included for the purpose of
determining contract price are broadly agreed upon in advance. The accounts of the
contractor are usually subject to audit by the contractee.
Cost-plus contracts are usually entered into for executing special type of work, like
construction of dam, powerhouse, newly-designed ship, etc., where cost estimation is
difficult. Government often prefers to give contracts on ‘cost-plus’ terms.
Cost-plus contracts offer the following advantages:
To the Contractor:
1. There is no risk of loss on such contracts.
 CONTRACT COSTING 9

2. It protects him from the risk of fluctuations in market prices of material, labour,
etc.
3. It simplifies the work of preparing tenders and quotations.
To the Contractee:
The contractee can ensure a fair price of the contract by being entitled to audit the
accounts of the contractor.
The disadvantages of cost-plus contracts are:
To the Contractor:
1. The contractor is deprived of the advantages which would have accrued due to
favourable market prices.
2. The contractor has to suffer for his own efficiency. This is because profit is
usually based as a percentage of cost and efficient working resulting in lower
cost also leads to lower profits.
To the Contractee:
1. The contractee has to pay more for the inefficiency of the contractor as a
contractor has no incentive to reduce costs.
2. The price a contractee has to pay is unknown until after the completion of work.

PROBLEMS AND SOLUTIONS

Problem 1.1:
The following expenditure was incurred on a contract of ` 12,00,000 for the year
ending 31-12-2015.
`
10 ADVANCED COSTING AND AUDITING

Materials 2,40,000
Wages 3,28,000
Plant 40,000
Overheads 17,200

Cash received on account of the contract to 31st Dec., 2015 was ` 4,80,000, being 80%
of the work certified. The value of materials in hand was ` 20,000. The plant had undergone
20% depreciation.
Prepare Contract Account. (B. Com., Madurai )

Solution:

Contract Account for the year ending 31st December, 2015

Particulars ` Particulars `
To Materials 2,40,00 By Materials in hand 20,000
To Wages 0 By Plant in hand (40,000 less 32,000
To Plant 3,28,000 20%)
To Overheads 40,000
17,200 By Work-in-progress
To Notional Profit c/d F 100 6,
26,800 Work certified GH4,80,000 00,000
 IJK
6,52,00 6,
To Profit & Loss A/c 0 52,000
80
(26,800 × 2/3 × 80 14,293 26,800
% ) To Reserve
12,507 By Notional Profit b/d
26,800 26,800
 CONTRACT COSTING 11

*Note: Profit transferred to Profit and Loss Account is computed by the following
method:
Notional Profit × 2/3 × Cash ratio.
Problem 1.2:
The following expenses were incurred on an unfinished contract during the year
2015.
Materials `
90,000
Wages `
60,000
Other expenses `
30,000
` 2,00,000 was received by the contractor, being 80% of the work certified. Work
done but not certified was ` 5 ,000. Determine the profit to be credited to profit and loss
account and profit kept reserve in all the three alternatives given below:
(i) Contract price is ` 3 , 00,000

Particulars ` Particulars `
To 90,000 By Working
2,
Materials 60,000 Progress: Work
50,000
To Wages certified
30,000 FGH 100 IJ K
To Other expenses 2,00,000 
75,000 5,000
To Notional profit
2,55,000 80 2,
By Work uncertified 55,000
(ii) Contract price is ` 5 , 50,000 (iii) Contract price is
` 12 , 00,000
12 ADVANCED COSTING AND AUDITING

Solution:
Contract Account for the year 2015

Profit credited to profit and loss account:

2, 50,000
(i) When contract price is ` 3,00,000, work certfied is 3, 00,000 × 100 = 83.33% of the
contract price. As it is more than 50% of the contract price, profit credited to
P&L A/c is
Notional profit × 2/3 × 80 %
= 75,000 × 2/3 × 80%= ` 40,000
Profit in reserve = ` 75,000 – 40,000 = ` 35,000

(ii) When contract price is ` 5,50,000, work certfied is × 100 = 45.55% of

the contract price. As it is less than 50%, profit to be credit to P&L A/c is
Notional profit × 1/3 × 80 %

= 75,000 × 1/3 × 80% = ` 20,000

Profit in reserve = ` 75,000 – 20,000 = ` 55,000
(iii) When contract price is ` 12,00,000, work certfied is

× 100 = 20.83%. As
it is less than 25% of the contract price, no profit is credited to P&L A/c and the
entire amount of notional profit is to be kept in reserve.

Problem 1.3:
How much of profit, if any, you would consider in the following case:
Contract price ` 20 ,
 CONTRACT COSTING 13

00,000
Cost incurred ` 11 ,
20,000
Cash received ` 10 ,
80,000
Work not certified ` 1,20,000
Deduction from bills by way of security deposit is 10%. (Adapted)

Solution:
Cash received is 100 – 10% = 90% of the bills or work certified. Thus work certified:
100
= 10,80,000 × = ` 12,00,000
90
Notional profit = (Work certified + Uncertified) – Cost incurred
= (12,00,000 + 1,20,000) – 11,20,000 = ` 2,00,000.
12, 00,000
Work certified is 20, 00,000 × 100 = 60% of the contract price, profit to be transferred

to P&L A/c is computed as follows:

Notional profit × 2/3 × cash ratio
= 2,00,000 × 2/3 × 90% = ` 1,20,000.

Problem 1.4:
The following were the expenses on a contract which commenced on 1st January 2015.
`
Materials purchased 1 , 10,000
Material at the end 1,250
Direct wages 15,000
Plant issued 5,000
Direct expenses 8,000
The contract price was ` 1,50,000. It was duly received when the contract was
completed on 31-3-2015. Charge indirect expenses at 15% on wages and provide ` 1,000
for depreciation on plant. Prepare the contract account and contractee’s account.
Solution:
Contract Account for the year ending 31-12-2015

Particulars ` Particulars `
By Contractee’s A/c (Contract 1,
To Materials 1,10,000 price) 50,000
14 ADVANCED COSTING AND AUDITING

To Direct wages 15,000 By Materials at the end 1,250

To Direct expenses 8,000 By Plant at the end (5,000 – 4,000
1,000)
To Indirect expenses (15% on 2,250
15,000)
To Plant issued 5,000
To Profit and Loss A/c 15,000
1,55,250 1,
55,250
Contractee’s
Accountfor the yearending31-12-2015

Particulars ` Particulars `

To ContractA/ 1,50,000 ByBank 1,50,000

c
1,50,000 1,50,000

Note:As the contractis fullycomplete,

entireprofitis transferred
to profitand lossaccount.

Problem1.5:
Thekedar accepted a contract for the construction of`a10,00,000,
building for
the contractee
agreeing to pay 90% of work certified by the architect. During the first year, the amounts spent
were:

Particulars ` Particulars `

Material 1,20,000 Machinery 30,000

Labour 1,50,000 Otherexpenses 90,000

At theend of theyear, themachinery was valued

at ` 20,000and materials
at sitewere
of the value of ` 5,000. Work certified during the year totalled ` 4,00,000. In addition
workin-progress not certified at the end of the year had cost ` 15,000. Prepare Contract
Account in the books of Thekedar. Also show the various figures of profit that can be
reasonably transferred
to the Profit and Loss Account. (B.Com., Delhi)

Solution:
Contract Account for the year ending.........

Particulars ` Particulars `
To Materials 1,20,00 By Work-in-progress:
0
To Labour 1,50,00 Certified 4,
0 00,000
To Machinery 30,000 Uncertified 15,000
 CONTRACT COSTING 15

To Other expenses 90,000 By Machinery at site 20,000

To Notional Profit c/d 50,000 By Materials at site 5,000
4,40,00 4,
0 40,000
To P&L A/c 15,000 By Notional Profit c/d 50,000
*
To Reserve 35,000
50,000 50,000
* Working Notes: Transfer to P&L A/c = 50,000 × 13 × 90% = ` 15,000
Other figures that may alternatively be transferred to P&L A/c may be computed as
follows:

1. Notional profit × 13 = 50,000 × 13 = ` 16,667.

Work certified 4 , 00,000

2. Notional profit × Contract price × Cash ratio = 50,000 × 10 , 00,000 × 90% = `
18,000

Workcertified 4,00,000
3. Notionalprofit× Contract
price = 50,000×10,00,000 = ` 20,000

Problem1.6:
The BBAConstruction Companyundertakeslarge contracts.The followingparticulars
relateto contractNo.125 carriedout duringthe yearendedon 31st March,2015.

Particulars ` Particulars `

Workcertifiedby architect 1,43,000 Wagesaccruedon 31st March2015 1,800

Costof worknot certified 3,400 Directexpenditure 2,400
Plantinstalledat site 11,300 Materialson handon 31st March2015 1,400
Valueof planton 31st March2915 8,200 Materialsreturnedto store 400
Materialssent to site 64,500 Directexpenditureaccruedon
Labour 54,800 31st March2015 200
Establishmentcharge 3,250 Contractprice 2,00,000
Cashreceivedfromcontractee 1,30,000

Prepare a Contract Account for the period ending 31st March 2015 and find out the profit.
It was decided to transfer 2/3 of the profit on cash basis to Profit and Loss Account.
(B.B.A., B.I.S. Delhi)
Solution:
16 ADVANCED COSTING AND AUDITING

Contract No. 125 Account for the year ending 31st March, 2015

Particulars ` Particulars `
To Materials sent to site 64,500 By Materials returned 400
To Labour 54,800 By Materials in hand 1,400
To Establishment charge 3,250 By Work-in-Progress:
To Direct expenses 2,400 Certified 1,
43,000
To Wages accrued 1,800 Uncertified 3,400
To Direct expenses accrued 200 By Plant at site 8,200
To Plant at site 11,300
To Notional Profit c/d 18,150
1,56,400 1,
56,400
To P&L A/c GH18,150 11,000 By Notional Profit b/d 18,150
  IJ K 7,150
F 2 1,30,000

3 1,43,000 18,150 18,150

To Reserve
Problem 2.7:

Particulars ` Particulars `
To Materials direct to site 4,20,000 By Materials on 6,300
To Materials from store 81,200 hand By Work-
To Labour on site 4,05,000 in-progress: 11 ,
12,100 Certified 00,000
To Hire and use of plant
16,500
To General overhead 37,100 Uncertified
To Wages accrued 7,800
To Direct expenses 23,000
To Direct expenses accrued 1,600
To Notional profit c/d 1,
35,000
11,202,800 By Notional Profit c/d 11,202,800
To P&L A/c
72,000 1 , 35,000
 2 8,80,000 
1,35,000× × 
 CONTRACT COSTING 17

 3 11,00,000  63,000
To Reserve 1,35,000 1 , 35,000
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.
` `
Labour on site 4,05,000 Materials on hand on June 30th, 2015 6,300
Materials direct to site 4,20,000 Wages accrued on June 30th, 2015 7,800
Materials from stores 81,200 Direct expenses accrued on June 30th 2015 1,600
Hire and use of plant 12,100 Works not yet certified at cost 16,500
Direct expenses 23,000 Amount certified by the Corporation’s
General overhead allocated to the engineer 11,00,000
contract 37,100 Cash received on account 8,80,000

Prepare (a) Contract Account, (b) Contractee’s Account, and(c) show how it would appear
in the Balance Sheet. (B.Com., Delhi)

Solution:
Contract Account for the year ending 30th June, 2015

Contractee’s Account

Particulars ` Particulars `
To Contract A/c 8,80,000 By Cash 8,
80,000
8,80,000 8,
80,000
Liabilities ` Assets `
7,80,00 11 ,
Wages accrued 0 Work certified 00,000
Direct expenses accrued 1,600 Work uncertified 16,500
11 ,
16,500
Less: Cash received 8,
80,000
2,
36,500
Less: Reserve 63,000 1 ,
18 ADVANCED COSTING AND AUDITING

73,500
Balance Sheet as on 30th June, 2015

Problem 1.8:
Modern Contractors have undertaken the following two contracts on Ist 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., 2015 1,883 1,736
Wages accrued 31st Dec., 2015 2,400 2,100
Direct expenditure accrued 31st Dec., 2015 240 180
Value on plant 31st Dec., 2015 11,000 9,500
The contract prices have been agreed at ` 2,50,000 for contract A and ` 2,00,000 for
contract B. Cash has been received from the contractees as follows: Contract A ` 1,80,000
and Contract B ` 1,40,000.
Prepare Contract Accounts, Contractees Accounts and show how the work-in-
progress shall appear in the Balance Sheet of the contractor. (B.Com., Delhi; Bangalore)
Solution:

Particulars ` Particulars `.
To Materials sent to site 85,349 By Materials (returned res) 549
To Labour 74,375 to sto 1,883
To Plant 15,000 By Materials in hand 11,000
To Direct expenditure 3,167 By Plant in hand 1,
To Establishment 4,126 By Work-in- 95,000
 CONTRACT COSTING 19

charges To Wages 2,400 progress: Work 4,500 1,

accrued certified 99,500
240 Work uncertified
To Direct expenses 28,275
accrued To Notional 2,12,93 2,
Profit c/d 2 12,932
17,400 * 28,275
By Notional Profit b/d
To Profit & l.oss A/c 10,875
To Balance c/d (Reserve) 28,275 28,275
Contract ‘A’ Account for the year ending 31st Dec., 2015

*Note: Proportion of profit transferred to Profit and Loss Account has been calculated by the following
formula:

2 Cash received 2 1,80,000

Notional profit × × = 28,275 × × = ` 17,400
3 Work certified 3 1,95,000

A Contractee’s Account

Particulars ` Particulars `
20 ADVANCED COSTING AND AUDITING

2015 2015
Dec.3 To Balance c/d 1,80,000 Dec. By Cash 1,
1 31 80,000
1,80,000 1,
80,000
2016
Jan. 1 By Balance b/d 1,
80,000
Contract ‘B’ Account for the year ending 31st Dec., 2015

Particulars `. Particulars `.
To 73,267 By Materials returned to store 632
Materials 68,523 By Materials in hand 1,736
To Labour 12,500 By Plant in 9,500
To Plant 2,859 hand By Work-
To Direct expenditure 3,852 in-progress:
1,
To Establishment charges 2,100 Work certified1 , 45,000
48,000
To Wages accrued 180 Work uncertified 3,000 3,413
To Direct expenditure accrued
1,63,281 By Loss transfer to P&L A/c 1,
63,281
B Contractee’s Account

Particulars ` Particulars `
2015 2015
Dec.31 ToBalance c/d 1,40,00 Dec. By Cash 1,
0 31 40,000
1,40,00 1,
0 40,000
2016
Jan. 1 By Balance b/d 1,
40,000
Balance Sheet as on Dec. 31, 2015

Liabilit ` Assets `.
ies
 CONTRACT COSTING 21

Wages accrued 4,50 – 7,000) 20,50

(2,400 + 2,100) 0 0
Direct expenses 42 3,619
accrued (240 + 1 0 1,
80) 95,000
4,500
Profit on contract 13,987
A 17,400 Less: 1,
Loss on contract 99,500
B 3,413 10,875 8,625
1,
Plant less Depreciation (27,500
Materials in hand 88,625
Work-in-progress:
Contract A
1,80,00
Work certified 0 8,000
Work uncertified
1,
Less: Profit in reserve 45,000
3,000
Less: Cash received
Contract B
Work certified 1,
Work uncertified 48,000
1,40,00
Less: Cash received
0
Problem 1.9:
T.K. Construction Ltd. is engaged on two contracts A and B during the year. The
following particulars are obtained at the year end (Dec. 31):
Contract A Contract
B
Date of commencement April 1 Septembe
r1
Contract price 6,00,000 5 , 00,000
Materials issued 1,60,000 60,000
Materials returned 4,000 2,000
Materials on site (Dec. 31st) 22,000 8,000
Direct labour 1,50,000 42,000
Direct expneses 66,000 35,000
Establishment expenses 25,000 7,000
Plant installed at cost 80,000 70,000
22 ADVANCED COSTING AND AUDITING

Value of plant (Dec. 31st) 65,000 64,000

Cost of contact not yet certified 23,000 10,000
Value of contract certified 4,20,000 1 , 35,000
Cash received from contractess 3,78,000 1 , 25,000
Architect’s fees 2,000 1,000
During the period, materials amounting to ` 9,000 have been transferred from
contract A to contract B. You are required to show: (a) Contract Accounts, (b)
Contractees’ Accounts, and
(c) Extracts from Balance Sheet as on December 31st, clearly showing the calculation of
work-
in-progress. (B.B.M., Bangalore)

Solution:
Contract ‘A’ Account for the year ending 31 st Dec............

Particulars ` Particulars `

To Materials used 1 ,60,000 By Materials returned 4,000

To Direct labour 1 ,50,000 By Materials transferred to B 9,000
To Direct expenses 66,000 By Stock of materials 22,000
To Establishment expenses 25,000 By Work-in-Progress:
To Depreciation on plant 15,000 Work certified 4 ,20,000
To Architect’s fees 2,000 Work uncertified 23,000 4 ,43,000
To Balance c/d (Notional Profit) 60,000
4 ,78,000 4 ,78,000
To P&L A/c 36,000 By Balance b/d 60,000

1,35,000× 2 × 8,80,000 

 3 1,10,000  
To WIP A/c (Reserve ) 24,000
60,000 60,000

Contract ‘B’ Account for the year ending 31 st Dec............

 CONTRACT COSTING 23

Particulars ` Particulars `
To Materials used 60,000 By Materials returned 2,000
To Materials from Contract A 9,000 By Stock 8,000
To Direct labour 42,000 materials By
To Direct expenses 35,000 Work-in-
progress: 1,
To Establishment expenses 7,000
45,000
To Depreciation on plant 6,000 Work certified 1 , 35,000
5,000
To Architect’s fees 1,000 Work uncertified 10,000
1,60,000 1,
By P&L A/c (Loss on contract) 60,000
A Contractee’s Account

Particulars ` Particulars `
To Balance c/d 3,78,000 By Cash 3,
78,000
By Balance b/d
3,
78,000
B Contractee’s Account

Particulars ` Particulars `
To Balance c/d 1,25,000 By Cash 1,
25,000
By Balance b/d
1,
25,000
Balance Sheet (Extracts) as on 31st December .....................

Liabilitie ` Assets `
s
24 ADVANCED COSTING AND AUDITING

Profit on 31,00 Plant 1 , 50,000 1,

Contract 0 Less: Depreciation 21,000
A Stock of materials
36,000 29,00
Contract A 22,000
Less: Contract B 8,000
Loss on
Contract Work-in-progress : 0
B 5,000 Contract A
Work certified 4,20,000
Work uncertified 23,000
4,43,000 30,00
Less: Reserve 24,000
4,19,000
Less: Cash received 3,78,000 0
Work-in-progress:
Contract B
Work certified 1,35,000
Work uncertified 10,000
1,45,000
Less: Cash received 1,25,000

41,000

20,000
Problem 1.10:
A firm of contractors undertook three contracts on 1st April, 2014, Ist October, 2014
and 1st Jan., 2015. On 31st March, 2015, when their accounts were made up, the position
was as follows:
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 7,000
 CONTRACT COSTING 25

General expenses 4,000 1,400 500

Plant 20,000 8,000 6,000
Materials on hand 4,000 2,000 1,000
Wages outstanding 3,400 1,800 800
Work certified 2,00,000 80,000 18,000
Cash received 1,50,000 60,000 13,500
Work uncertified 6,000 4,000 1,050
General expenses 600 200 100
outstanding
The plants were installed on the respective dates of the contract and depreciation is
taken
at 10% p. a. Prepare contract accounts. (B.Com.)

Solution:
Contrac Contrac Contrac Contrac Contrac Contrac
t t t t t t
I II III I II III
` ` ` ` ` `
By Work-in-
To Material 72,000 29,000 10,000 progress:
To Wages 1,10,000 56,200 7,000 Certified 2,00,000 80,000 18,000
To General 4,000 1,400 500 Uncertified 6,000 4,000 1,050
expenses
To Plant 20,000 8,000 6,000 By Plant* 18,000 7,600 5,850
To Wages 3,400 1,800 800 By Materials 4,000 2,000 1,000
outstanding in hand
To General By P&L A/c — 3,000 —
expenses (loss)
outstanding 600 200 100
To P&L A/c* 9,000 — —
To Reserve 9,000 — 1,500
2,28,000 96,600 25,900 2,28,000 96,600 25,900
Contract Accounts for the year ending 31st March 2016
26 ADVANCED COSTING AND AUDITING

*Working Notes:
1. On Contract I, notional profit is ` 18,000. Transfer to P&L A/c is calculated as follows:

1,50,000
Notional profit × 2 3 Cash ratio = 18,000 × 2 3 × = ` 9,000.
2,00,000
2. Depreciation is calculated from the respective dates of installation of plant.
3. On Contract II, loss is transferred to P&L A/c.
4. On Contract III, work certified is less than 1 /4 of the contract price. Thus the entire amount of
notional profit is kept as reserve.

Problem 1.11:
Compute a conservative estimate of profit on a contract (which is 80% complete)
from the following particulars. Illustrate at least four methods of computing the profit
transferable to P&L A/c.
`
Total expenditure 85,000
Estimated further expenditure to complete the contract (including contingencies)
17,000
Contract price 1 , 53,000
Work certified 1 , 00,000 Work not certified 8,500
Cash received 81,600
(B.Com. Hons., Delhi)
Solution:
Calculation of Notional Profit ` Calculation of Estimated `
Profit
Work certified 1,00,000 Contract price 1 ,
53,000
Uncertified 8,500 Less: Expenditure incurred 85,000
1,08,500 Estimated further expenditure 17,000 1 , 02,000
Less: Expenditure incurred 85,000
51,000
Notional profit 23,500 Estimated profit
 CONTRACT COSTING 27

Methods of computing the profit to be transferred to P&L A/c

1. Notional Profit × × Cash ratio = 23,500 × = ` 12,784 ( approx. )

2 2
3 2. Notional
3 Profit × = 23,500 × = ` 15,667 ( approx. )

Work certified 1,00,000 81,600

3. Estimated Profit × × Cash ratio = 51,000 × × = ` 27,200
Contract price 1,53,000 1,00,000

Total cost to date 85,000 81,600

4. Estimated Profit × × Cash ratio = 51,000 × × = ` 34,680 Estimatedtotal cost 1,02,000
1 , 00,000

Problem 1.12:
An expenditure of ` 3,88,000 has been incurred on a contract upto the end of 31st
December, 2015. The value of work certified is ` 4,40,000. The cost of work uncertified is
` 12,000. It is estimated that contract will be completed by 31st March, 2015 and an
additional expenditure of ` 80,000 will have to be incurred to complete the contract. The
total estimated expenditure on the contract is to include a provision of 2.5 per cent for
contingencies. The contract price is ` 5,60,000 and ` 4,00,000 has been realised in cash
upto 31st December, 2015. Calculate the proportion of profit to be taken to Profit and
Loss Account as on 31st December, 2015 under
different methods. (B.Com. Hons., Delhi; M.Com. Madras)

Solution:
Calculation of Notional Profit Estimated Profit on Full Contract
` `
Value of work certified 4,40,000 Contract price 5 , 60,000
Add: Cost of work not certified 12,000 Less: Cost to date 3 , 88,000

4,52,000 Further cost 80,000

Contingencies 12,000 *
Less: Cost to date 3,88,000
4,80,000
Notional Profit 64,000 Estimated profit
80,000

2.5
* (3,88,000 + 80,000) × = ` 12,000 for contingencies.
28 ADVANCED COSTING AND AUDITING

97 .5
Profit to be transferred to Profit and Loss Account

Method (i) × Notional profit = × 64,000= ` 42,667

2 Cash received 2 4 , 00,000

Method (ii) × Notional profit × = × 64,000 × = ` 38,788

3 Workcertified 3 4 , 40,000

Work certified 4 , 40,000

Method (iii) Estimated profit × = 80,000 × = ` 62,857 Contract price 5,
60,000

Work certified Cash received

Method (iv) Estimated profit × ×

Contract price Workcertified

4,40,000 4,00,000
= 80,000 × × = ` 57,143
5,60,000 4,40,000

Problem 1.13:
The following information relates to a building contract for ` 10,00,000.
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 6,000 1,400
Work certified 7,50,000 10,00,000
Work uncertified 8,000 —
Materials at site 5,000 7,000
Plant issued 14,000 2,000
Cash received from contractee 6,00,000 10,00,000

The value of plant at the end of 2014 and 2015 was ` 7,000 and ` 5,000, respectively.
 CONTRACT COSTING 29

Prepare: (i) Contract Account, (ii) Contractee’s Account for two years 2014 and 2015
taking into consideration such profit for transfer to Profit and Loss Account as you think
proper. (B.Com.)
Solution:
Contract Account for two years 2005 and 2006

Particulars ` Particulars `

Year 2014
To Materials 3,00,000 By Work-in-progress:
To Direct wages 2,30,000 Work certified 7 ,50,000
To Direct expenses 22,000 Work uncertified 8,000 7 ,58,000
To Indirect expenses 6,000 By Materials at site 5,000
To Dep. on plant (14,000 – 7,000) 7,000
To Balance c/d (Profit ) 1 ,98,000
7,63,000 7 ,63,000

Contractee’s Account

Problem 1.14:
To P&L A/c rve) 1,05,60 By Balance b/d 1,
0 98,000
F 2 6,00,000
G
H1,98,000   IJ K

7,50,0 92,400
30 ADVANCED COSTING AND AUDITING

3 00 1,98,00 By Contractee A/c 1,

7,50,000 8,000 0 By Materials at site 98,000
To Work-in-progress A/c ( 7, 6, 10 ,
Rese 58,000 65,600 00,000
92,400 5,00 7,00
0 0
Year 2006
84,000
To Work-in-progress:
1,
Certified
05,000
Uncertified
10,000
– 1,400
Less: Profit in reserve 5,000)
4,00
To Materials at site b/d 0
To Materials issued
To Direct wage 1,
32,000
To Direct expenses
To Indirect expenses 10,07,00 10 ,
0 07,000
To Depreciation on plant
(14,000 + 2,000 –
7,000 To P&L A/c
Particulars ` Particulars `
2014
To Balance c/d 6,00,00 By Cash 6,
0 00,000
6,00,00 6,
2015 0 00,000

To Contract A/c 10,00,0 By Balance b/d 6,

00 00,000
By Cash (balance) 4,
00,000
10,00,0 10 ,
00 00,000
XY Co. undertook a contract for ` 15,00,000 on an arrangement that 80% of the
value of work done as certified by the architects of the contractee, should be paid
immediately and the remaining 20% be retained until the contract is completed.
 CONTRACT COSTING 31

In 2013, the amounts expended were: Materials ` 1,80,000; Wages ` 1,70,000;

Carriage ` 6,000; Cartage ` 1,000; Sundry expenses ` 3,000. The work was certified for `
3,75,000 and 80% of this was paid as agreed.
In 2014, the amounts expended were: Materials ` 2,20,000, Wages ` 2,30,000,
Carriage ` 23,000. Cartage ` 2,000 and Sundry expenses ` 4,000. Three-fourths of the
contract was certified as done by 31st December, 2005 and 80% of this received
accordingly. The value of unused and work-in-progress was ascertained at ` 20,000.
In 2015, the amounts expended were: Materials ` 1,26,000; Wages ` 1,70,000;
Cartage ` 6,000; Sundry expenses ` 3,000, and on 30th June the whole contract was
completed.
Show how the Contract Account as also the Contractee’s Account would appear for
each of these years in the books of the contractor, assuming that balance due to him was
received
on completion of the contract. (B.Com., Bangalore)

Solution:
Contract Account

Particul ` Particulars `
ars
2013
To Materials 1,80,00 By Work-in-progress: Certified 3,
0 75,000
To Wages 1,
70,000
To Carriage 6,0
00
To Cartage 1,0
00
To Sundry 3,0
expenses 00
To Notional Profit 15,0
c/d 00
3,75,00 3,
0 75,000
To P&L A/c 4,0 15,0
(15,000 × 1/3 × 00 00
80 % ) By Notional Profit b/d
To Reserve 11,0
00
32 ADVANCED COSTING AND AUDITING

2014 15,0 15,0

00 00

To Work-in- 3,75,00 By Work-in-progress:

progress: Certified 0
Less: Reserve Certified 11 ,
11,00 Uncertified 25,000
0 20,0
3,64,00 00
0
To Materials 2,
20,000
To Wages 2,
30,000
To Carriage
23,00
0
To Cartage 2,0
00
To Sundry 4,0
expenses 00
To Notional Profit 3,
c/d 02,000
11,45,0 11 ,
00 45,000
2015
To P&L A/c 1,61,06 By Notional Profit b/d 3,
(3,02,000 × 2/3 7 02,000
× 80 % )
To Reserve 1,
40,933
 CONTRACT COSTING 33

3,02,00 3,
0 02,000

2016
To Work-in-
Progress:
Certified 11,25,0 By Contractee 15 ,
00 00,000
Uncertified 20,0
00
11 ,
45,000
Less: Reserve 1,
40,933
10 ,
04,067
To Materials 1,
26,000
To Wages 1,
70,000
To Cartage 6,0
00
To Sundry 3,0
expenses 00
To Profit & Loss 1,
A/c 90,933
15,00,0 15 ,
00 00,000
34 ADVANCED COSTING AND AUDITING

Contractee’s Account

Particulars ` Particulars `

2013
To Balance c/d 3,00,000 By Cash 3 ,00,000
2014
To Balance c/d 9,00,000 By Balance b/d 3 ,00,000
By Cash 6 ,00,000
9,00,000 9 ,00,000
2015
To Contract A/c 15 ,00,000 By Balance b/d 9 ,00,000
By Cash 6 ,00,000
15 ,00,000 15 ,00,000

Problem 1.15:
Elite Ltd. was engaged on one contract during the year 2015 . The contract price was
` 2,00,000. The Trial Balance extracted from the books on 31 st December, 2015 stood as
follows:
` `
Share capital — 40,000
Sundry creditors — 4,000
Building 17,000 —

Cash at bank 4,500 —

Contract account:
Materials 37,500 —
Plant 10,000 —
Wages 52,500 —
Cash received from contractee (80% of certified work) — 80,000
Expenses 2,500 —
1,24,000 1,24,000

Of the plant and materials charged to the contract, plant costing ` 1,500 and materials
costing ` 1,200 were destroyed by an accident.
On 31-12-2015, plant costing ` 2,000 was returned to stores and material at site was
valued at ` 1,500. Cost of uncertified work was ` 1,000. Charge 10% depreciation on
plant.
Prepare Contract Account for the year 2015 and Balance Sheet as on 31-12-2015.
(B.Com., Bangalore)
Solution:

Particulars ` Particulars `
 CONTRACT COSTING 35

To 37,500 By Plant returned to store 1,80

Materials 52,500 (2,000 less 10% 0
To Wages 2,500 Depreciation) 5,85
To Expenses 10,000 By Plant at site 0
To Plant installed 10,350 By Plant destroyed 1,50
To Notional profit c/d By Materials lost 0
By Materials at 1,20
site By Work-in- 0
progress: 1,50
Certified* 0
Uncertified
To P&L A/c 1,
 2 80,000  10,350 × 00,000
× By Notional profit b/d 1,000
1,12,8 1,
 3 1,00,000  50 12,850
To Reserve 5,25 By Notional profit b/d 5,25
0 0

4,83 5,25
0 0
10,350 10,350
Contract Account for the year ending 31st Dec., 2015
36 ADVANCED COSTING AND AUDITING

Balance Sheet as on 31st Dec., 2015

Problem 1.16:

Liabilities ` Assets `
Share Capital 40,0 Building 17,00
Sundry Creditors 00 Bank 0
4,00 Plant in store 4,500
Profit and Loss A/c 5,520 0 Plant at site
Less : Plant destroyed Materials at site
Work-in-progress:
Less : Materials lost 1,200 Certified 1 , 00,000
2,820
Uncertified 1,000
1 , 01,000
Less: Cash received 80,000 16,170
46,82 21,000 46,820
0 Less: Reserve 4,830
The following is the Trial Balance of Construction Company engaged on the
execution of Contract No. 303, for the year ended 31st December, 2015.
 CONTRACT COSTING 37

Dr. ` Cr. `
Contractee’s account (amount received) — 3 ,
00,000
Buildings 1,60,000 —
Creditors — 72,0
00
Bank balance 35,000 –
Capital account — 5 ,
00,000
Materials 2,00,000 –
Wages 1,80,000 –
Expenses 47,000 –
Plant 2,50,000 —
8,72,000 8,72,000

The work on Contract No. 303 was commenced on 1st January, 2015. Materials
costing ` 1,70,000 were sent to the site of the contract but those of ` 6,000 were destroyed
in an accident. Wages of ` 1,80,000 were paid during the year. Plant costing ` 50,000 was
used on the contract all through the year. Plant with a cost of ` 2 lakhs was used from 1 st
January to 30th September and was then returned to the stores. Materials of the cost of `
4,000 were at site on 31st December, 2015.
The contract was for ` 6,00,000 and the contractee pay 75% of the work certified.
Work certified was 80% of the total contract work at the end of 2015. Uncertified work
was estimated at ` 15,000 on 31st December, 2005. Expenses are charged to the contract
at 25% of wages. Plant is to be depreciated at 10% for the entire year.
Prepare Contract No. 303 Account for the year 2015 and make out the Balance Sheet
as on 31st December. 2015 in the books of Construction Company. (BBM, Bangalore)
Solution:

Particulars ` Particulars `
1,70,0 4,
To Materials 00 By Work certified 80,000
To Wages 1,80,0 By Work uncertified 15,000
00
To Expenses 45,000 By P&L A/c (Loss by 6,00
To Depreciation on plant accident) 0
(5,000 + 15,000) 20,000 By Materials at site 4,00
0
To Notional profit c/d 90,000 By Notional profit b/d
38 ADVANCED COSTING AND AUDITING

To P&L A/c (90,000 × 2/3 × 5,05,0 5,

5/8*) 00 05,000
37,500 90,000
To Balance (Reserve) 52,500
90,000 90,000
Contract No. 303 Account for the year ending 31-12-2015
Balance Sheet as on 31st Dec., 2015
Liabilities ` Assets `
Capital 5,00,00 Building 1,
P&L A/c 37,500 0 Plant in stores 60,000
Materials in store 1,
Less: Loss 80,000
Less: Unabsorbed expenses Work-in-progress: 30,000
2,000 Certified 4 , 80,000
Uncertified 15,000
(47,000 – 45,000)
29,500 4 , 95,000
Less: Depreciation on Plant* 24,500 Less: Reserve 52,500 1,
5,000
4 , 42,500 42,500
72,000 Less: Cash 3,00,000 4,000
Creditors 45,000
Materials at site 35,000
5,96,50 Plant at site 5,
0 Bank 96,500
* Notes:
1. The cash ratio for computing the profit to be transferred to Profit and Loss Account has
been taken
3,00,000  Cashreceived  as 5/8 i.e..   . It
may also be taken as 75% as given in the question. In that 4,80,000 
Workcertified 
 CONTRACT COSTING 39

case,profitto be transferred
to P&LA/cwillbe ` 45,000.
2. Depreciation onplantof ` 2,00,000has beenchargedto contractonlyfor 9 months.Forremaining
threemonthsit has beenchargedto profitin the balancesheet.

Problem1.17:
The following figures are extracted from the books of a contractor, for the year ending 31st
Dec.,2015:
` `
Work-in-progresson 31st Dec.,2014 17,00,000
Less:Advances fromcontractees 11,00,000 6,00,000
Materialssuppliedto contractsdirect 1,20,000
Materialsissuedfromstore 2,10,000
Wages 1,70,000
Workingexpenses 30,000
Materialsreturnedto store 11,000
Contractsfinished 4,50,000

Work certified 3 , 00,000

Profit taken to Profit and Loss Account upon contracts 2 , 30,000
completed
Administrative expenses (out of which ` 5,000 is chargeable to
Profit and Loss Account) 25,000
Plant issued 50,000
Materials returned from contract to suppliers 9,000
Advances from contractees 8 , 00,000
Plant at site 40,000
Prepare the Contract Ledger Control Account in general ledger and total contractees
account.
Show also how the work-in-progress would appear in the Balance Sheet as on 31st
December,
2015. (B.Com., Bangalore) Solution:
Contract Ledger Control Account

Particulars ` Particulars `
17,00,0 4,
To Work-in-progress b/d 00 By Contractees A/c 50,000
To Materials issued 2,10,00 (Contracts finished)
0
To Materials supplied direct 1,20,00 By Materials returned to store 11,00
0 0
To Wages 1,70,00 By Materials returned to 9,00
40 ADVANCED COSTING AND AUDITING

0 suppliers 0
To Works expenses 30,0 By Plant at site 40,00
00 0
To Plant issued 50,0 By Work-in-progress:
00
To Administration expenses 20,0 Certified 3,
00 00,000
To Profit 2,30,00 Uncertified (Balancing figure) 17 ,
0 20,000
25,30,0 25 ,
00 30,000
Total Contractees’ Account

Balance Sheet as on 31-12-2015

Liabilities ` Assets `
Work-in-progress:
Certified 3 , 00,000
Uncertified 17 , 20,000

20 , 20,000 5 ,
Less: Cash received 14,50,000 70,000
Particulars ` Particulars `
4,50,00 11 ,
To Contract Ledger Control A/c 0 By Balance b/d 00,000
To Balance c/d 14,50,0 By Bank 8,
00 00,000
 CONTRACT COSTING 41

19,00,0 19 ,
00 00,000
EXAMINATION QUESTIONS

Objective Type Questions

True or False Statements:
1. A job is a small contract and a contract is a big job.
2. Profit on each contract is computed every year on incomplete portion of the contract.
3. When a contract is 50% complete, 50% of its profit on cash basis is generally
transferred to Profit and Loss A/c at the end of the year.
4. There is no difference betwen notional profit and estimated profit in relation to
contracts.
5. When there is a notional loss on an incomplete contract, transfer to P&L A/c
depends upon the degree of completion of the contract.
6. Escalation clauses in contracts are often provided as safeguards against any likely
changes in price of materials and labour rates.
Ans. 1. T 2. F 3. F 4. F 5. F 6. T
Theoretical Questions
1. Distinguish between job costing and contract costing. State the special features of
contract costing.
(B.Com.,
Madras) 2. What is contract costing ? Explain briefly the principles involved in taking
profit on incomplete contracts.
(B.B.M., Bangalore)
3. Explain how the profits are determined in the case of uncompleted contracts.
(B.Com., Andhra)
4. What is cost-plus contract ? Discuss this from the point of view of (a) the
manufacturer, (b) the buyer.
(B.Com., Calicut)
5. What is the relevance of escalation clause provided in contracts?
6. Discuss the methods of ascertaining profit on the following contracts:
(a) When contract is completed.
(b) When contract is not completed.
42 ADVANCED COSTING AND AUDITING

(c) When the contract is nearing completion. (B.Com., Meerut

)
7. Write short notes on:
(i) Cost-pluscontracts
(ii) Escalationclause.

PracticalQuestions
1. Mrs. Smitha started work on a contract
` 5,00,000
for on 1.1. 2015. The following information relating to the contract
is available.
Materialsissued 1,60,000
Wagespaid 1,01,200
Wages outstanding on 31.03.2015 37,520
New machines purchased and sent to site 1,48,000
Direct charges paid 7,500
Direct charges outstanding on 31.03.2015 600
Establishment charges apportioned to contract 6,400
On 31.03.2015 materials lying unused at site were `valued
21,620.
at Machines are to be depreciated at 20% p.a.
Value of work certified by 31.3.2015
` 3,50,000
was while the cost of work done but not yet certified as on that date
was ` 18,000. Mrs. Smitha had received a total sum of ` 2,80,000 from the contractor
till 31.3.2015.
Prepare contract account in Mrs. Smitha ledger. (B.Com., Bharathidasan)
[Ans. Notional profit ` 69,000. Profit transferred to P&L A/c ` 36,800]
[Hint. Depreciation is to be provided only
for 3 months] 2. The following particulars
relate to a contract:
`
Materials issued 85,000
Wages 74,000
Plant at cost 15,000
Direct Expenses 13,000
Establishment charges 4,000
Materials returned to store 500
Cost of work certified 2 , 00,000
Cost of work uncertified 4,500
Materials on hand (31st December) 1,800
Wages outstanding 2,500
Value of Plant (31st December) 10,000
The contract price was agreed at ` 2,60,000. Cash received from the contractee was `
1,95,000.
Prepare contract account and contractees account and also balance sheet abstract.
[Ans. Notional profit ` 23,300; Profit tr. to P&L A/c ` 15,145, Profit in reserve `
8,155]
 CONTRACT COSTING 43

3. Mr. Reddy undertook several contracts. On 31st March 2015 Contract No. 900
showed the following particulars.
` `
Materials purchased 1,80,000 Direct expenses 24,000 Materials issued from stores
50,000 Plant purchased 1 , 60,000
Wages 2,44,000 Proportionate establishment charges 54,000
Depreciation on plant 16,000
The contract was for ` 15,00,000. ` 6,00,000 had been received by Reddy upto 31st
March 2015 which represented the amount certified less 20% retention money.
Unused materials at site were valued at ` 15,000. Prepare the contract account
showing the amount of profit Mr. Reddy would be justified in taking to the credit of
his profit and loss account. (B.Com., Bharathidasan)
[Ans. Notional profit ` 1,97,000. Profit tr. to P&L A/c ` 1,05,067, Profit kept in
reserve ` 91,933, work certified ` 7,50,000]
4. The following was the expenditure on a contract for ` 6,00,000. Work commenced in
January 2015.
Materials ` 1,30,000
Wages ` 1,44,400
Plant ` 20,000
Business expenses ` 18,600
Cash received on account was ` 2,40,000, being 80 per cent of work certified. Value
of materials on hand at 31.12.2015 was ` 10,000. Prepare the contract account for
2015 showing the profit to be credited to profit and loss
account. Plant is to be depreciated at 10 per cent. (B.Com. Adapted)
[Ans. Notional profit ` 15,000, Profit credited to P&L A/c ` 8,000, Reserve ` 7,000.
Work certified ` 3,00,000]
5. M/s X and Co. obtained a contract for building a factory for ` 10,00,000. The
building operation started on I April. 2014 and at the end of March, 2015, they
received from the party a sum of ` 3.9 lakhs, being 75% of the amount due on the
surveyor’s certificate. The following additional information is given from the books
of the company:
` `
Stores issued to cortract 2,00,000 Direct expenses 25,000
Stores on hand 31st March, 2015 10,000 Overhead allocated to 12,00
contract 0
Wages paid 1,80,000 Work uncertified at cost 12,00
44 ADVANCED COSTING AND AUDITING

Plant purchased for the contract 2,00,000 Plant to be 0

depreciated at 10 %
Prepare Contract Account showing the profit or loss on the contract as on (B.Com.)
31st March. 2015.
[Ans. Tr. to P&L A/c ` 52.500; Reserve ` 52,500]
6. The following information relates to two contracts of K.P
Contractors in 2015:
Contract A Contract
B
` `
Materials sent to site 1,70,698 1 , 46,534
Labour 1,48,750 1 , 37,046
Plant 30,000 25,00
0
Direct expenses 6,334 5,71
8
Establishment charges 8,252 7,70
4
Materials returned to store 1,098 1,26
4
Work certified 3,90,000 2 , 90,000
Work uncertified 9,000 6,00
0
Material at site (31-12-2015) 3,766 3,47
2
Wages accrued 4,800 4,20
0
Direct expenses accrued (31-12-2015) 480 360
Value of plant (31-12-2015) 22,000 19,00
0
Contract price 5,00,000 4 , 00,000
Cash received 80% of work certified.
Prepare: (i) Contract Accounts (ii) Contractee’s Accounts. (B.Com., Bangalore)
[Ans. A — Tr. to P&L A/c ` 30,160; Reserve ` 26,390: B — Loss ` 6,826]
7. Modi Constructions Ltd. has taken two contracts on 1st Oct., 2014. The position of
the contracts on 30 th Sept., 2015 is as follows:
Contract I Contract
II
` `
Contract price 27,00,000 60 ,
 CONTRACT COSTING 45

00,000
Materials 5,80,000 10 ,
80,000
Wages paid 11,24,000 16 ,
50,000
Other expenses 28,000 60,000
Plant at site 1,60,000 3 , 00,000
Unused materials at site 40,000 60,000
Wages payable 36,000 4,000
Other expenses due 4,000 9,000 Work certified 16,00,000 30 , 00,000
Cash received 12,00,000 22 , 60,000 Work uncertified 80,000 90,000
The plant at site is to be depreciated at 10%. Prepare the Contract Account in respect
of each work showing the notional profit and also profit to be transferred to Profit
and Loss Account.
[Ans. 1 - Loss ` 68,000; II - Tr. to P&L A/c ` 1,33,500, Reserve ` 1,33,500]
9. Gupta Construction Ltd. took a contract in 2015 for road construction. The contract
price was ` 10,00,000 and its estimated cost of completion would be ` 9,20,000. At
the end of 2015, the company has received ` 3 ,60,000, representing 90% of the
work certified. Work not yet certified has cost ` 10,000. Expenditure incurred on the
contract during 2015 was as follows; Materials ` 50,000; Labour ` 3,00,000; Plant `
20,000.
Materials costing ` 5,000 were damaged and had lo be disposed of for ` 1,000. Plant
is considered as having depreciated by 25 per cent.
Prepare Contract Account for 2015 in the books of Gupta Construction Ltd. Also
show all possible figures that can be reasonably credited lo Profit and Loss Account
in respect of the contract. (B.Com., Delhi) [Ans. Notional profit ` 60,000, Estimated
profit ` 80,000]
10. Work out in a suitable cost accounts form the financial result in respect of a contract
for construction of temporary buildings undertaken by a firm in a River Valley
Project. Your answer should be based on the following figures extracted from the
financial books of the firm.
The term of the contract is ` 10 per sq. ft. of the covered floor area as accepted and
certified to be correct by the competent engineering authorities of the project.
(a) Material: Building materials in stock at the commencement of the work ` 10,000,
purchases during the currency of the contract: (i) Cement 900 bags @ ` 50 per
bag, (ii) Bricks 10,000 @ ` 500 per thousand, (iii) Sand 10.000
c.ft., @ ` 10 per 100 c.ft., (iv) Wood work 90 c.ft. @ ` 100 per c.ft. Value of
balance of various materials in hand after completion of the work ` 8,000.
46 ADVANCED COSTING AND AUDITING

(b) Labour: 10 masons @ ` 25 per day for 40 days, 50 coolies @ ` 10 per day for 40
days.
(c) Tools and Plants: Two new concrete mixers were purchased at ` 10,000 each at
the commencement of the contract. Residual value as assessed after completion
of the contract @ ` 3,500 each concrete mixer.
(d) Supervision: 50% of four engineers’ pay @ ` 500 per month for each engineer
for 2 months. 50% of ten overseers pay at ` 200 per month for each overseer for 4
month.
(e) Administration overhead: 25% of the head office expenses for the period of the
contract. The total head office expenses amount to ` 4,000.
(f) Quantity of work done: Quantity of work certified and accepted by the
Engineering Authorities of Project 12,000 sq. ft. of covered floor area.
(B.Com.)
[Ans. Profit tr. to P&L A/c ` 8,000 ]
11. Ranga undertook a contract for ` 75,00,000 on an arrangement that 80% of the value
of the work done, as certified by the architects of the contractee, should be paid
immediately and the remaining 20% be retained until the contract was completed.
Ranga’s record showed the following position:
Year Materials Wages Carriage Sundry Stock of
work
expenses uncertifie
d
2013 9,60,000 8,50,000 35,000 35,000 Nil
2014 11,00,000 11,50,000 1,25,000 20,000 1 , 00,000
2015 6,30,000 8,50,000 30,000 15,000 Nil
Architect’s certificates were for ` 18,75,000 during 2013, for ` 37,50,000 during 2014 and
for ` 18,75,000 during
 CONTRACT COSTING 47

2015.
Show the Contract Account and Contractee Account in Ranga’s books. (B.Com., Bangalore
)
[Ans.2013— Loss` 5,000; 2014 —Tr. to P&L A/c
` 7,76,000; Reserve
` 6,79,000; 2015 — Profit
` 9,29,000]
12. The following information related to a building contract
` 10,00,000
for and for which 80% of the value of work
in-progress as certified by the architect is being paid by the contractee.
I Year II Year III Year
` ` `
Materialissued 1,20,000 1,45,000 84,000
Direct wages 1,10,000 1,55,000 1,10,000
Directexpenses 5,000 17,000 6,000
Indirectexpenses 2,000 2,600 500
Work certified 2,35,000 7,50,000 10,00,000
Uncertifiedwork 3,000 8,000 —
Plant issued 14,000 — —
Material on site 2,000 5,000 8,000
The value of the plant at the end of I, II and III year was ` 11,200, ` 7,000 and `
3,000 respectively. Prepare Contract Account, for these three years taking into
account such profit as you think proper on incomplete contract.
(B.Com.)
[Ans. I yr. Reserve ` 200, II yr. Profit ` 1,06,347; Reserve ` 93,053: III yr. Profit `
1,33,553]
13. India Construction Limited engaged in contract work has the following Trial
Balance on 31st December, 2015 :
Dr. Cr
` `
Share capital — Shares of ` 10 each – 35,1
80
Profit and Loss A/c as on 1st Jan., 2015 – 2,500
Provision for depreciation on plant and tools – 6,300
Contractee’s A/c — Contract No. 707 – 1 ,
28,000
Creditors – 8,120
Land and building (at cost) 7,400
Plant and tools (at cost) 5,200
Bank balance 4,500
Contract No. 707:
Materials issued 60,000
Direct labour 83,000
Expenses 4,000 Plant and tools at site (at cost) 16,000
48 ADVANCED COSTING AND AUDITING

1,80,100 1 , 80,100
Contract No. 707, having a contract price of ` 2,40,000 was begun in 1st January,
2015 and contractee pays 80% of the work completed and certified. The cost of
work done since certification is estimated to be ` 1,600. After the above Trial
Balance was extracted on 31st Dec., 2015. plant costing ` 3,200 was returned to the
stores and materials at site on that date were valued at ` 3,000. Provision is to be
made for sub-contract costs amounting to ` 600 incurred on Contract No. 707 and
for depreciation of all Plant and Tools @ 12.5% on cost. Prepare Contract No. 707
Account showing the computation of profit, if any, for which credit, may properly
be taken in 2015 and prepare the Balance
Sheet of the construction company on 31st December, 2015. (B.Com.)
[Ans. Tr. to P&L A/c ` 8,000. Reserve ` 7,000, B/S Total ` 69,700]
14. Alcon Construction Company Ltd. commenced its business construction on 1-1-
2015. The trial balance as on 31-12-2015 shows the following balances :
Dr. Cr.
` `
Paid-up share capital — 1,00,000
Cash receivedon account of contract (80% of work certified) — 1,20,000
Land and Buildings 30,000
Machineryat cost (75% at site) 40,000
Bank 4,000
Materialsat site 40,000
Direct Labour 55,000
Expensesat site 2,000
Lorries and vehicles 30,000
Furniture 1,000
Office equipment 10,000
Postage and telegrams 500
Office expenses 2,000
Rates and taxes 3,000
Fuel and power 2,500
2,20,000 2,20,000
The contract price` is3,00,000 and work certified
` 1,50,000.
is The work completed since certification is estimated
at ` 1,000 (at cost). Machinery costing ` 2,000 was returned to stores at the end of the
year. Stock of material at site on 31-12-2015 was of the value of ` 5,000. Wages
outstanding were ` 200. Depreciation on machinery at 10%. You arc required to
calculate the profit from the contract and show how the work-in-progress will appear
in the Balance
Sheet as on 31-12-2015.(B.B.M., Bangalore)
[Ans. Tr. to P&L A/c ` 28,427. Reserve ` 24,873]
 CONTRACT COSTING 49

[Hint. Office expenses, postage and telegrams, rent and rates, fuel and power and
depreciation on machinery costing ` 10,000 are not charged to Contract Account.
These are charged to P&L A/c of the company.]
15 . A firm of building contractors began to trade on 1st January, 2015. During the year,
the company was engaged on only one contract. The contract price was ` 5,00,000.
Of the plant and materials charged to the contract, the plant which cost ` 5,000 and
material which cost ` 4 ,000 were lost in an accident.
On 31st December 2015. the plant which cost ` 5,000 was returned to the stores: the
cost of work done but uncertified was ` 2,000 and the materials costing ` 4,000 were
in hand on site.
Charge 10% depreciation of thc plant and compile the Contract Account and the
Balance Sheet from the following Trial Balance on 31st December, 2015.
` `
Share capital — 1 ,
20,000
Creditors — 10,000
Cash received on contract (80% of work certified) — 2 ,
00,000
Land, buildings, etc. 43,000
Bank balance 25,000
Charged to Contract:
Materials 90,000
Plant 25,000
Wages 1 , 40,000
Expenses 7,000
3,30,000 3,30,000

(B.Com.,
Calicut) [Ans. Tr. to P&L A/c ` 11,200: Reserve ` 9,800: B/S total ` 1,32,200]
16. M/s Sewers Ltd. undertook a contract for erecting a sewerage treatment plant for
municipality for a total value of ` 24 lakhs. It was expected that the contract would
be completed by 31st March 2015. You are required to prepare a contract account
for the year ending 31st March 2015 from the following particulars:
(i) Wages ` 6,00,000
(ii) Special plant ` 2,00,000
(iii) Materials ` 3,00,000
(iv) Overheads ` 1,20,000
(v) Depreciation @ 10% to be provided on plant.
50 ADVANCED COSTING AND AUDITING

(vi) Materials lying at the site on 31st March 2005 ` 40,000.

(vii) Work certified was to the extent of ` 16,00,000 and 80% of same was received
in cash.
(viii) 5 per cent of the value of material issued and 6 per cent of wages may be
taken to have been incurred for the portion of work completed but not yet
certified.
(ix) Overheads are charged as percentage of direct wages.
(x) Ignore depreciation on plant for use on uncertified portion of the work.
(xi) Ascertain the amount to be transferred to Profit and Loss Account on the basis
of realised profit.
[Ans. Transfer to P&L A/c ` 3,51,040, Reserve `
3,07,160] [Hint. Work uncertified is calculated as
under:
`
Material (5% of ` 3,00,000) 15,0
00
Labour (6% of ` 6,00,000) 36,0
00
Overhead (20% of ` 36,000) 7,20
0
Cost of work not certified 58,2
00
18. Philips Construction Company with a paid up share capital of ` 50 lakhs undertook
a contract to construct LIG houses. The contract work commenced on 1-1-2015 and
the contract price was ` 50 lakhs. Cash received on account of contract on 31-12-
2015 was ` 18 lakhs (90% of the work certified). Work completed but not-certified
was estimated at ` 1,00,000. As on 31-12-2015 material at site was estimated at `
30,000 and machinery at site costing ` 2,00,000 was returned to stores. Plant and
machinery at site is to be depreciated at 5%. Wages outstanding on 3112-2015 were
` 5,000.
The following were ledger balances (Dr.) as per Trial Balance as on 31-12-2015:
`
Land and buildings 15 ,
00,000
Plant and machinery at cost (60% at site) 25 ,
00,000
Lorries and other vehicles 8,
00,000
 CONTRACT COSTING 51

Furniture 50,000
Office equipment 10,000
Materials sent to site 14 ,
00,000
Fuel & Power 1,
25,000
Site expenses 5,000
Postage & telegrams 4,000
Office expenses 8,000
Rates & taxes 15,000
Cash at bank 1,
33,000
Wages 2,
50,000
Prepare the Contract Account to ascertain the profit from the contract and show the
WIP in the Balance Sheet.
[Ans. Notional profit ` 2,43,000: Tr. to P&L A/c 2,43,000 × 1/3 × 90% = ` 72,900;
Reserve ` 1,70,100: WIP in B/S = 20,00,000 + 1,00,000 – 18,00,000 –
1,70,100 = ` 1,29,900
Hint. Fuel and power, office expenses, rates and taxes and postage and telegrams have
been assumed to be charged
to the contract].

