Edu-Care Professional Academy:, 243, Sundaram Coplex, Bhanwerkuan Main Road, Indore

EDU-CARE PROFESSIONAL ACADEMY
Meaning of Contract A contract is nothing but a big job having following features: 1. A high price of thousands or lakhs of rupees. 2. The period taken for completion may be many months or even years. 3. The actual work may be done at a site away from the main office of the contractor. Contract Costing Contract costing is the method of costing used to find out the cost and profit of each contract for a given period. Contract costing which applies where the work is undertaken to customers special requirement and order which is of a longer duration and which is carried out at site which is different from contractors premises. Contract costing enables the contractor to ascertain and control the cost of each job or contract. Contract costing is applicable when the work is usually of constructional nature for e.g. construction of road, building, dams, erection of factories, bridges, and other civil engineering works, the technique of contract costing is preferable.
Important terms under contract costing 1. Contractor: Contractor is the person who undertakes the contract (job). 2. Contractee: Contractee is the person for whom contract job is undertaken. 3. Contract price: Contract price is the amount agreed to be paid by the contractee to the contractor as consideration for the job done. The contract price may be payable in lump-sum when work is completed. Alternatively, the amount may be paid in installments as the work progresses. The amount of each installment would depend on the amount of work done and certified by the architects. 4. Work Certified: In the case of large contract, normally the contractor receives on account payment against the value of the work completed at specific intervals. Work certified is that part of work completed for which the contractor gets the certificate of the architect. In the case of large contract, the contractor would expect the contractee to make a payment of the contract price in installments. He therefore, sends a part bill to the contractee as and when a portion of the work is completed. An architect, appoint in terms of the contract, between the contractor and contractee, scrutinizes the part bill, he certifies the work done for the purpose of payment. 5. Work Uncertified: Work uncertified is that cost of work done which relates to the period between the dates of work certified and accounting year ending. At the end of the accounting period, not all work done would have been certified by the architect. Compiled by: GOURAV KUMAR JASHNANI (B.Com, CA FINAL, CS FINAL) 9926955326, 94071-21248, 243, SUNDARAM COPLEX, BHANWERKUAN MAIN ROAD, INDORE Page 1

6. Retention Money: Retention money is that part of work certified which is retained by the contractee so as to safeguard his interest in case of future defects in the work done. The contractee does not pay full amount of the value of work certified. He keeps certain amount till contract is complete. This amount so kept is by contractee is called retention money. 7. Escalation Clause: This is to safeguard against likely change in price of cost elements rise by and certain % over the prices prevailing at the time of tendering the contractee has to bear the cost.
Performa of Contract Account
Contract A/c For the year ended

Particulars To Material Bought To Materials Issued From Stores Material contract transfer to other XXX XXX XXX XXX XXX Rs. XXX XXX Particulars By Materials Lost (Cost) By materials sold (Cost) By Materials returned to stores By Materials transferred to XXX other contract XXX By Plant and machinery (WDV) XXX By plant Lost (Cost) By plant sold (Cost) By Closing stock of material By Work-in-progress: Work Certified Work Uncertified XXX XXX XXX By Notional Profit XXX XXX XXX XXX XXX Rs. XXX XXX
To Labour (Wages) To Wages outstanding To Direct Expenses To Indirect Expenses To Establishment Charges
XXX To Plant & Machinery (purchase XXX price/Book value) XXX To Notional Profit XXX XXXX To Profit & loss A/c To Reserve For Contingency XXX XXX XXX
Compiled by: GOURAV KUMAR JASHNANI (B.Com, CA FINAL, CS FINAL) 9926955326, 94071-21248, 243, SUNDARAM COPLEX, BHANWERKUAN MAIN ROAD, INDORE
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Two possible accounting methods for plant and machine: 1. If the plant is purchased specifically for a particular contract: In this situation the cost of plant (original cost) is debited to the contract account and depreciated value (WDV) of plant is credited at the end of accounting period. 2. If Plant is already in stock (Commonly used): In this situation a reasonable amount of depreciation is charged to contract account as an expense.
Determine the amount to be transferred to profit & loss account Step-1 Find the extent of work certified: The value of work certified is to compared with the total contract price to ascertain the % of the work completed. Thus, % of work Certified = Amount of work certified X 100 Total contract price Step-2 Calculate the amount to be transferred to profit and loss account The standard rules for transferring the amount of such profit to P & L A/c in relation to the extent of work completed. Extent or Work Completed: 0 to 24 % 25 % or more but less than 49 % 50 % or more but less than 90% Profit to be Considered: No profit is transferred to P&L a/c 1/3rd of notional profit transferred to P&L a/c & remaining in reserves 2/3rd of notional profit is transferred to P&L a/c & remaining in reserves.
When contract is almost complete (i.e. 90% or more) 100 % i.e. when entire contract is complete. There is no need to keep ant reserve and the entire profit may be credited to the P&L A/c Note: 1 Find amount of profit to be transferred to profit & loss account based on % of completion of work: Profit to be transferred to P&L A/c = Notional Profit X 1 /3 or 2/3 X Cash Received Work Certified Note: 2 in any case, whenever there is a loss. It should be entirely debited to the profit and loss account irrespective of the stage of completion. This is in accordance with the basic convention of conservation followed by accountants.
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Practical Problems: 1. From the information given below, relating to an incomplete contract, prepare contract account and work in progress account: Particulars Material sent to site Labour engaged at site Plant issued at cost Direct expenses Establishment charges Materials returned to store Work certified Work uncertified Materials in hand Wages accrued Cash received Depreciation on plant Amount (Rs.) 86,000 65,000 80,000 8,000 4,000 600 1,90,000 7,700 2,000 3000 1,61,500 7,000
2. The following is the summarized record as on December 31, 2009 of all transactions relating to Contract No. 80 which was commenced on January 1, 2009 and completed during the year. Particulars Materials purchased directly Materials supplied from stores Wages Expenses directly chargeable Indirect expenses Plant installed Total contract price Value of plant at site on Dec. 31, 2009 Materials at site in Dec. 31, 2009 Prepare contract account from the above information. Amount (Rs.) 12,700 5,200 21,440 2,940 3,000 18,000 60,000 10,000 900
3. The following is summarized record relating to Contract no. 103 commenced from 1 st January 2009. Particulars Materials issued from stores Materials transferred from Contract no. 105 Materials purchased Wages Outstanding wages Plant purchased for this contract Indirect charges Outstanding indirect charges Amount (Rs.) 60,000 6,000 54,000 48,000 12,000 50,000 10,000 2,000 Page 4

Material worth Rs. 2000 and plant costing Rs. 2500 were returned to stores. Materials costing Rs. 4000 and plant costing Rs. 1500 were stolen. Materials worth Rs. 500 and plant costing Rs.500 were destroyed by fire. Materials and plant transferred to contract no. 96 were Rs. 5250 and Rs. 4000 respectively. Materials costing Rs. 4200 were sold for Rs. 6000 and plant costing Rs. 1000 were sold for Rs. 1250. Materials at site were Rs. 2600. Provide depreciation on plant @ 10%. Open Contract account and found out the cost of work done on the contract. The contract is not completed. 4. Following expenses were incurred by a contractor on a contract which he started on 1 st January 2009. Particulars Materials Wages Other expenses Plant at cost Work certified Work not certified Materials in hand on 31st Dec. 2009 Plant at cost Cash received from contractee Materials returned to stores Amount (Rs.) 40,000 50,000 15,000 50,000 1,20,000 60,000 11,000 43,000 1,00,000 2,000
Prepare the contract a/c assuming contract price to be Rs. 6,50,000 and showing profit to be taken to P&L a/c. 5. Mr. A has undertaken several contract works. He maintains a separate record for each contract. From the records for the year ending 31-12-2009 prepare contract account and find the amount transferred to profit and loss account. Particulars Direct purchase of material Materials issued from stores Wages Direct expenses Machinery purchased Establishment charges Amount (Rs.) 1,80,000 50,000 2,44,000 24,000 1,60,000 54,000
The contract price was Rs.15,00,000. Cash received up to 31-12-2009 was Rs. 6,00,000 which is 90% of work certified. Material at site is Rs. 16,000. Depreciation for machinery was Rs. 16,000.
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6. Following are the expenses on a contract for Rs. 12,00,000 commenced in January 2009. Particulars Materials Wages Plant Overheads Work uncertified Amount (Rs.) 2,40,000 3,28,000 40,000 17,200 8,000
Cash received on account of the contract on 31 st Dec. 2009was Rs. 4,80,000 being 80% of work certified. The value of materials in hand was Rs. 12,000. The plant had undergone 20% depreciation. Prepare contract account. [MBA 2011] 7. On January, 2011 sharma and sons undertook a contract for Rs. 5,00,000 and incurred the following expenses during the year: Particulars Materials consumed Labour Outstanding Labour Direct expenses Indirect expenses Plant issued Establishment charges Work certified Work uncertified Cash received Amount (Rs.) 50,000 40,500 1,500 20,800 2,200 30,000 15,700 1,50,000 20,000 80% of work certified
On 31st December 2011 plant and materials at site were valued Rs. 25,000 and Rs. 10,000 respectively. Prepare contract account work in progress account and ascertain the amount of profit which can reasonably be credited to profit and loss account. [MBA 2012] 8. M/S dhirendra jain & company if a firm of government contractors. The firm took a contract for Rs. 5,00,000on 1st April, 2008 and the following expenses were incurred till 31st march, 2009: Particulars Material purchased and sent directly at the site Materials issued from stores Plant issued and debited to the contract Wages paid Wages outstanding Office and administration expenses Amount (Rs.) 62,500 50,000 30,000 65,000 14,500 10,500
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Material worth Rs. 5,000 not found suitable for the contract and returned to stores. Cash received up to 31st March, 2009 amounted to Rs. 2,10,000 being 75% of work certified. Materials valued Rs. 6,000 and plant costing Rs. 5,000 were destroyed due to fire occurred at site. On 31st March, 2009 plant costing Rs. 5,000 returned to stores and the material costing Rs. 5,000 were sold for Rs. 9,000. The cost of work done but not certified was Rs. 15,000. Materials at site were valued at Rs. 8,000. Charge depreciation @ 10% on plant, Reserve 1/4th of the profit received, transfer 3/4th of profit received to profit and loss account. Prepare contract account in the books of M/s dhirendra Jain & company. [MBA 2010] 9. A firm of building contractors began to trade on 1st April, 2009; the following was the expenditure on a contract for Rs. 3,00,000. Particulars Materials issued to a contract Plant used for contract Wages incurred Other expenses incurred Amount (Rs.) 51,000 15,000 81,000 5,000 Cash
received account to 31st March 2010 amounted Rs. 1,28,000 being 80% of the work certified. Of the plant and materials charged to the contract, plant which cost Rs. 3,000 and materials which cost Rs. 2,500 were lost. On 31st March, plant which cost Rs. 2,000 was returned to stores, the cost of work done but uncertified was Rs. 1,000 and materials costing Rs. 2,300 were in hand on site. Charge 15% depreciation on plant reserve 1/3 of the profit received and prepare a contract account from the above particulars. 10. The following details are available from the books of accounts (for the year ended March 31, 2009) of a contractor with respect to a particular contract (No. 113) he has undertaken for a manufacturing organization: Particulars Material sent to site Labor engaged in site Cost of plant installed at site Direct expenses Establishment expenses Materials returned to stores Work certified Cost of work not certified Materials in hand (as on 31st March, 2009) Accrued wages (as on 31st March, 2009) Accrued direct expenses Value of plant (as revalued on 31st March, 2009) Amount (Rs.) 5,11,800 4,66,100 1,00,000 24,000 29,000 2,120 10,70,000 31,000 12,200 11,160 1,330 88,000
The contract price agreed upon with the contractee is Rs. 13,00,000. Payment of Rs. 9,90,000 has been received from the contractee. Compiled by: GOURAV KUMAR JASHNANI (B.Com, CA FINAL, CS FINAL) 9926955326, 94071-21248, 243, SUNDARAM COPLEX, BHANWERKUAN MAIN ROAD, INDORE
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You are required to prepare the Contract Account No. 113, computing and incorporating in the said account, the profit to be taken to the Profit and Loss Account for the year ended 31st March 2009. 11. Write up contract Account from the following particulars: Direct materials Special plant Wages Loose-tools Stores issued Cost of tractor: Running materials Wages of driver Other direct charges 19,800 8,800 13,200 1,650 3,520 1,100 1,760 1,320
On 31st Dec. plant at site valued at Rs. 7,480. The value of loose-tools and stores returned was Rs. 1,100 and Rs. 445 respectively. The value of tractor was Rs. 10,000 and the depreciation on it was to be charged to this contract Rs. 375. Value of work certified on 31st Dec. amounted to Rs. 50,000 of which of 75% was received in cash. You are required to provide for administrative expenses at the rate of 10% of total works cost of the contract. 12. The following particulars relate to a contract undertaken by a firm of engineers on 1st January 2009 Particulars Materials sent to site Labour engaged on site Plant installed at cost Direct expenditure Establishment charges Materials returned to stores Cash received from contractee Cost of work not certified Materials in hand on 31st December 2009 Value of plant at 31st December 2009 Amount (Rs.) 85,000 75,000 15,000 3,000 2,000 1,000 1,52,000 5,000 1,000 11,000
The contract price has been agreed at Rs. 250000. Cash received from the Contractee was 80% of work certified. You are required to prepare Contract Account without calculating profit.
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13. The following information relates to contract No. 101. Prepare the contract account. Rs. Direct materials 45,600 Direct wages 24,400 Special plant 18,400 Stores issued 6,040 Loose tools 3,560 Expenses of tractor: Running materials 3,500 Wages of drivers. Etc 4,540 Other direct charges 2,560 The contract was completed in 26 weeks at the end of which plant was returned subject to depreciation at 15% p.a. on original cost. The value of loose tools and stores returned were Rs.2,260 and Rs. 840 respectively. The value of tractor was Rs. 40,000 and depreciation was to be charged to this contract at 20% p.a. Administration expenses at 10% on total works cost. The contract price was Rs. 125000. 14. The following details relate to contract no. 123 undertaken by a firm of builders:
Particulars Bricks and marbles purchased Materials from stores Wooden doors windows etc. Iron steel purchased Labour Sundry expenses Portion of supervision charges
Amount (Rs.) 1,16,330 19,600 25,000 7,200 1,49,200 4,050 17,400
The contract, which commenced on 1st February, 2009 was for Rs. 6,00,000 and the amount certified by the engineer after deduction of 20% retention money was Rs. 2,40,000, the work being certified up to 30th June 2009. A material at site on 30th June 2009 was Rs. 1,200. Prepare contract account showing profit or loss to be taken to P/L account.
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15. From the following information, prepare contract account in tabular form and show how these figures appear in the balance sheet as on 31st December, 2009: Contract A B C Commencement 1-1-2009 1-7-2009 1-10-2009 Rs. Rs. Rs. Contract Price 80,000 54,000 60,000 Raw Materials 14,400 11,600 4,000 Wages 22,000 22,400 2,800 General expenses 800 560 200 Plant installed 4,000 3,200 2,400 Materials in hand 800 800 400 Wages accrued 800 800 360 Work certified 40,000 32,000 7,200 Work uncertified 1,200 1,600 420 Cash received 30,000 24,000 5,400 Depreciation is to be charged on plant @ 10% which was installed on the opening date of the contract in each case. 16. Modern construction Ltd. had taken two contracts on 1 st October, 2009. The position of contracts on 30th September 2010 was as follows: Particulars Contract price Materials Wages paid Other expenses Plant at site Unused materials at site Wages payable Other expenses due Work certified Cash received Work completed but not yet certified Contract-I Rs. 27,00,000 5,80,000 11,24,000 28,000 1,60,000 40,000 36,000 4,000 16,00,000 12,00,000 80,000 Contract-II Rs. 60,00,000 10,80,000 16,50,000 60,000 3,00,000 60,000 54,000 9,000 30,00,000 22,50,000 90,000 Particulars
If the plant at site to be depreciated @ 10%, Prepare the contract accounts in respect of each work showing the notional profit and also the profit transferred to profit and loss account.
Compiled by: GOURAV KUMAR JASHNANI (B.Com, CA FINAL, CS FINAL) 9926955326, 94071-21248, 243, SUNDARAM COPLEX, BHANWERKUAN MAIN ROAD, INDORE Page 10

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EDU-CARE PROFESSIONAL ACADEMY