Contract Costing Questions and Answers

SECTION – A

Question 1.
What is contract costing?
Answer:
Contract costing is that form of specific order costing which applies where the work is undertaken according to customers’ requirements and each order is of long duration as compared to job costing.

Question 2.
Distinguish between contract costing and job costing.
Answer:

  • Contract is generally big while job is small
  • 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.
  • Allocation and appointment of overhead costs is simpler in contract accounts. Under job costing, allocation and apportionment of overhead is difficult
  • Jobs are usually carried out in factory premises while contract work is done at site.

Question 3.
State any four features of contract costing.
Answer:
The four features of contract costing are:

  • Contracts are generally of large size.
  • Work on contracts is carried out at the site of contracts.
  • A contract generally takes more than one year to complete.
  • Each contract undertaken is treated as a cost unit.

Question 4.
Name the parties to a contract.
Answer:
In every contract there are two parties i.e., contractor and contractee. The contractor is the person who undertakes to do the construction work. The contractee is the person for whom the contract is undertaken.

Question 5.
What is contract price?
Answer:
It is the price at which the contractor agrees to do the work for the contractee.

Question 6.
What are cost plus contracts?
Answer:
A cost plus contract is a contract in which the contract price is determined by adding a specified amount of profit to the cost of the contract. In other words, it is a contract in which the contractor is paid the actual cost incurred by him on the contract plus a certain amount towards his profit.

Question 7.
What is sub contract costs?
Answer:
Work of specialised character, for which facilities are not internally available is offered to a sub contractor For Example Steel work, glass work, painting etc. is usually carried out by the sub contractors who are accountable to the main contractor. The cost of such work is charged to the contract A/c.

Question 8.
What do you mean by works on cost?
Answer:
Works on cost is nothing but factory overheads. It includes the expenses incurred in the factory. The expenses incurred in factory while producing a product alone is considered as works on cost.

Question 9.
What is notional profit
Answer:
Difference between the value of work in progress certified and the cost of work in progress certified.

Question 10.
How do you calculate realised profit?
Answer:
Realised profit = 1/3 or 2/3 x \(\frac{\text { Cost received }}{\text { Work certified }}\) X Notional profit.

Question 11.
What is work certified?
Answer:
The value of work completed by the contractor and certified as completed by the architect appointed by the contractee.

Question 12.
What is work uncertified?
Answer:
It is the value of work completed by the contractor but not certified as completed by the architect appointed by the contractee.

Question 13.
What do you mean by work-in progress in contract costing?
Answer:
Until the entire work is completed the work is termed work in progress. Has to be valued the end of each financial year

Question 14.
What is Escalation Clause, why is it included in contract costing?
Answer:
It is a clause in the agreement between the contractor and the contractee which provides for her upward revision of the contract price, in the event of the cost of the contract going beyond a certain agreed level on account of rise in the prices of materials and labour.

It is included to cover up any likely increase in the cost of contract beyond a certain level on account of rise in the prices of materials and labour.

Question 15.
What is Retention Money? Why is it retained?
Answer:
A certain portion of the amount of work certified can be retained by the contractee for a specified period after the work is done. The sum retained by the contractee is called the retention money.

It is retained as a security for any defective work done by the contractor, non-completion of the work by the contractor within the given time.

SECTION – B

Question 1.
State the features of contract costing.
Answer:
The following are the main features of contract accounts.
(1) Higher proportion of direct costs: As most of the items of expenses can be directly identified with a contract, though indirect, are treated as direct expenses. Expenses on telephone installed at site, site power usage, site vehicles are treated as direct expenses.

(2) Low Indirect cost: The only item of indirect cost may be head office expenses. Such cost represents only a small proportion of the contract cost and is absorbed
usually on some overall basis such as percentage of total contract cost.

(3) Difficulties of cost control: The large scale of contracts and size of the site may create some major problems of cost control consuming material usage and losses, pilferage, labour supervision and utilisation, etc.

(4) Surplus materials: Surplus materials, if any will be either credited to contract account with cost of materials at the end of the contract or will be debited to new contract account, if directly transferred to another contract. If the material is not required immediately, it will be stored and the cost debited to a stock account.

Question 2.
Distinguish between job and contract costing.
Answer:
The following are the differences between job and contract costing.

Job costing Contract costing
1. A job is of small size A contract is of large size
2. Under job costing, work is performed in the workshop of the proprietor. Under contract costing, work is executed at site
3. Usually a job takes less time for its completion Usually a contract takes more time for its completion.
4. Here, the selling price is paid in full in after completing the job Here the contract price is paid various installments on the basis of progress of work.
5. In case of job costing, initially there is heavy investment on assets It does not involve much investment initially
6. Here the expenses may be direct or indirect Here most of the expenses are direct in nature.
7. Profit earned on job is directly transferred to P & L A/c profit Here, in case of incomplete contract, only proportionate is taken to P & L a/c on the basis of completion of work.

Question 3.
How do you treat the profit/loss on incomplete contracts?
Answer:
(a) Treatment of Loss: In case of an incomplete contract, if there is a loss during the financial year, the entire loss should be transferred to Profit and Loss Account.

(b) Treatment of Profit: If there is a profit on incomplete contract; only a portion of the profit is transferred to Profit and Loss Account. The remaining profit is kept as reserve to meet the contingencies.
There is no hard and fast rule regarding the amount of estimated profit to be transferred to Profit and Loss Account. However the following principles are applied.

Extent of construction Calculation of. amount of profit to be transferred to P&L Account
1. Less than 1/4 Nil (complete amount to be kept in reserve)
2. 1/4 and above but less than 1/2 Estimated profit x 1/3 x \(\frac{\text { Cash Received }}{\text { Work Certified }}\)
3. 1/2 and above Estimated profit x 2/3 x \(\frac{\text { Cash Received }}{\text { Work Certified }}\)
4. Almost complete Estimated profit x \(\frac{\text { work Certified }}{\text { Contract Price }}\)

Practical Problems

Question 1.
The following are the expenses are incurred on a contract, the price of which is 1,00,000 and it commenced on 1.1.2014.
Materials purchased 6,000; Materials in hand 1,000; D.Wages 20,000; Plant issued 4,000; D.Expenses 10,000
The contract was completed in November and the contract price was received charge indirect expenses at 25% of D.Wages and provide depreciation at 10% on plant.
Prepare the contract account.

Question 2.
Following is the information relating to a contract.
Contract price – 6,00,000
Raw materials – 1,20,000
Wags – 1,60,000
Subcontract – 5,000
Plant – 20,000
Materials transferred to other contract – 2,000
General expenses – 7,600
At the end of the year, cash received from the contractee was 2,50,000 being 80% of work certified. Value of materials unused at the end of the year was 18,000. Plant to be depredated at 20%. Prepare contract account.

Question 3.
How much of profit, if any would you allow to be transferred to profit and loss account in the following case?
Contract value – 10,00,000
Cost of the contract till date – 4,50,000
Cash received – 4,50,000 (90% in work certified)
Uncertified work – 50,000
Retention money is 10 percent.
Solution:
Calculation of profit
Work certified = 4,50,000 x \(\frac {100}{90}\) = 5,00,000
Notional profit = Work certified + Work Uncertified – Cost of the contract
= 5,00,000 + 50,000 – 4,50,000
= 1,00,000
Profit = 1,00,000 x \(\frac {2}{3}\) x \(\frac {4,50,000}{5,00,000}\) = 60,000
Reserve = 1,00,000 – 60,000 = 40,000

Question 4.
From the information given below prepare contract account.
Particulars – Amount ( )
Materials bought from the market – 3,000
Materials issued from stores – 1,000
Materials returned to stores – 480
Wages – 4,880
Direct Expenses – 588
Works on cost 25% of direct wages
Office on cost 10% of prime cost
Contract price of 12,000

Question 5.
You are required to prepare contract account showing the position of contract on 30.4.2014 from the following particulars:
Contract price 1,00,000; Materials sent to site 32,350; Labour engaged on site 27,400; Plant installed at site 5,650; Value of plant on 30.4.2014 4,100; Work certified’ 71,500; Cash received 65,000; Cost of work done but not certified 1,700; D.Expenses 1,200; Cost of establishment 1,625; Wages O/S 900; Materials in hand 700; Materials returned to stores ‘200; Direct Expenses O/S 100

Question 6.
The following particulars relate to a certain contract carried out during the year ended 31.3.2017.
Work certified – 1,43,000
Cash received from contractee – 1,30,000
Materials sent to site – 64,500
Labour – 56,600
Plant installed at site – 11,300
Value of plant at the end – 8,200
Cost of work not yet certified – 3,400
Establishment charges – 3,250
Direct expenditure – 2,600
Materials on hand at the end – 1,400
Materials returned to stores – 400
Contract price – 2,00,000
Prepare the Contract Account for the year ended 31.3.2017

Question 7.
A contractor prepares his accounts for the year ending 31st December each year. He commenced a contract on 1st April 2003. The following information relates to the contract as on 31st December 2003.
The contract price is 20,00,000. On 31.12.2003 two third of the contract was completed. The Architect issued certificate covering 50% of the contract price and the contractor received 7,50,000 on account.
Materials supplied to contract – 2,00,000
Materials issued from stores – 52,000
Direct wages – 5,10,000
Indirect wages – 55,000
Sub-contract cost – 4,000
Materials transferred to other contract – 9,900
Materials costing 2,000, sold for 2,500
Salary to foreman – 87,800
Other overheads – 1,30,000
Materials returned to stores – 5,400
Materials in hand at site (31.12.2003) – 30,000
A machine costing 2,70,000 has been on the site for 146 days, its working life is estimated at 7 years and its final scrap value at 25,000.
A Supervisor who is paid 10,000 per month, has devoted 1/4 of his time to this contract.
Prepare Contract account.

Question 8.
M/s Shiva Company undertook a contract for a total price of 5 lakh. Following is the abstract for the year ending 31-3-2007.
Material sent to site – 1,00,000
Material purchased – 70,698
Labour – 1,40,000
Outstanding wages on 31-3-2007 – 8,750
Plant installed – 30,000
Depreciation on plant – 8,000
Direct expenses – 6,334
Outstanding direct expenses on 31-3-2007 – 580
Overhead charges payable on 31-3-2007 – 9,250
Overhead charges – 8,252
Materials returned – 1,098
Work certified – 3,90,000
Work uncertified – 9,000
Material at site on 31-3-2007 – 3,766
Cash received from contractee – 3,60,000
Prepare the Contract a/c and show how WIP appears in Balance Sheet.

Question 9.
A contractor prepares his accounts for the year ending 31/12 each year. He commenced a contract on 1st April 2008. The following information relates to the contract as on 31-12-2008.
The contract price was 20,00,000. On 31-12-08 2/3 of the contract was completed. The architect issued certificate covering 50% of the contract price and the contractor received 7,50,000 on account. Other details are as follows :
Materials supplied to contract – 2,00,000
Materials issued from stores – 52,000
Direct wages – 5,10,000
Indirect wages – 55,000
Subcontract cost – 4,000
Material transferred to other contract – 9,900
Salary to foremen – 87,800
Other overheads – 30,000
Materials returned to stores – 7,400
Materials in hand at site 31-12-08 – 30,000
A machine costing 2,70,000 has been on the site for 146 days. The working life is estimated at 7 years its final scrap value at 25,000. A supervisor who is paid 10,000 per month has devoted 1/4 of his time to this contract. Prepare Contract Account.

Question 10.
The following information relates to a building contract for 10,00,000.

Question 11.
The following information relates to a building contract for’ 40,00,000 and for which 80% of the value of work-in-progress is certified by the architect is being paid by the contractee.

Question 12.
Vizoz Ltd, was engaged on a contract during the year 2008.
The contract price was 2,00,000. The trial balance extracted from the books on 31st Dec. 2008 stood as follows:

Particulars Debit ( ) Credit ( )
Share capital – 40,000
Sundry creditors – 4,000
Buildings 17,500 –
Cash at Bank 4,500 –
Contract account;
Materials 37,500 –
Plant 10,000 –
wages 52,500
Cash received from contractor (80% of work certified) – 80,000
Expenses 2,000 –
Total 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 fire.
On 31st December 2008 plant costing 2,000 was returned to stores and materials 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 2008 and the Balance sheet as on 31st December 2008.

Question 13.
Modem Construction Ltd. have undertaken the construction of a bridge. The contract price being 65 lakhs. The details regarding contract are as follows:
Materials bought – 16,50,000
Materials sent from stores – 4,00,000
Workers wages – 20,00,000
Direct expenses – 1,25,000
Rent of plant – 60,000
General overhead – 1,75,000
Materials on hand at the end – 31,500
Wages accrued at the end – 37,500
Direct expenses accrued at the end – 7,500
Cost of work certified by engineer – 55,00,000
Cost of work uncertified – 1,00,000
Cash received – 44,00,000
Prepare:
(1) Contract A/c
(2) Contractee A/c
(3) Balance Sheet with relevant items

Question 14.
The following informal ion relates to two cc the year 2018.

Particulars A( ) B( )
Materials sent to site 1,70,689 1,46,534
Labour 1,48,750 1,37,046
Plant 30,000 25,000
Direct Expenses 6,334 5,718
Establishment charges 8,252 7,704
Materials returned to stores 1,098 1,264
Work certified 3,90,000 2,90,000
Work uncertified 9,000 6,000
Materials at site (31.12.2018) 3,766 3,472
Wages outstanding (31.12.2018) 4,800 4,200
Direct expenses outstanding (31.12.2018) 480 360
Value of plant (31.12.2018) 22,000 19,000
Contract price 5,00,000 4,00,000

The cash received from the contracfee was 80% of the value of the work certified. Prepare contract account and contractee’s account.