What is contract costing?Types of contracts
Contract costing
Concept of contract costing
The term 'contract' refers to the understanding betwixt ii parties to bear out a sure wok inwards a specified menstruum of time. H5N1 contract is mostly related to a large size amongst high amount of coin as well as performed at site. There are ii parties involved inwards a contact namely the contractor as well as the co ICMA defines. "Contract costing is that shape of specific club costing which applies where go is undertaken to customer's especial requirements as well as each club is of long-term duration."
Contract costing is a shape of project costing inwards which a dissever ledger i.e. contract ledger is maintained for each job. It is too known concluding costing equally the contract work organisation human relationship is remained or unopen subsequently the completion of the go or contract. The top dog objective of the contract costing is to ascertain the full cost of contract so equally know the lucre or loss incurred shape the contract.
Feature of contract costing
The top dog features of contract costing are mentioned inwards the next points:
a. Contracts are execute or performed at the site which are mostly out of the contract's premises.
b. Most of the contracts involve jobs having large size as well as amount.
c. The duration of the completion of a contract may become beyond i accounting year.
d. Each contract is treated equally a dissever unit of measurement of cost for the purpose of cost ascertainment.
e. The contracts are executed equally per the agreed specifications provided past times the contracted.
f. Most of the items of costs incurred inwards a contract are direct inwards nature since a contract is carried out are the site.
g. Te contractor carried out the go on behalf of the contractee against a sure amount. The agreed amount is called the contract price.
h. The contractee pays amount to the amount to the contractor an the footing of the go certified out of the completed go past times the engineer of the contractee
Differences betwixt project club as well as contract costing
The differences betwixt project club contacts costing are mentioned below:
Differences betwixt project club as well as contract costing
The differences betwixt project club contacts costing are mentioned below:
Similarities betwixt project club as well as contract costing
The similarities betwixt project club as well as contact costing are mentioned below:
• Both jobs as well as contracts are based on the specific requirements of customers. As a result, each project or contract is 'tailor-made' as well as in that place is no exact repetition of a project or contract.
• Both project as well as contract is terminal. Each project as well as contract tin endure identified from get to goal and, therefore, costs tin endure identified for each project a contract.
• The basic principles of contract costing are similar to those applied inwards project costing.
a. Fixed cost contract: the contract that is executed amongst the fixed cost which is agreed past times the contract as well as the contractee is called the fixed cost contract. Under this contract, no modification is made inwards the agreed contract cost irrespective of the changes inwards the cost degree of fabric as well as labour inwards feature. In such type of contract, the contractor is benefited when the cost of fabric as well as labour decrease. In contrary to this, the contractee is benefited if the cost of fabric as well as labour increase.
b. Fixed cost contract amongst escalation as well as de-escalation clauses: escalation clause is a of understanding that that aims to trim down the risks that is causes due to the changes inwards the cost of materials, labour as well as other services. Under this, the contract cost is adjusted inwards accordance, amongst the changes inwards the cost of material, labour as well as other services. The additional cost raised due to the increment inwards cost is born past times the contracted. Similarly, the contract cost is reduced if the cost decreases below a sure percentage. It is called de-escalation or contrary clause. Escalation clause condom guides the involvement of both the contractor as well as contractor against unfavorable cost alter inwards future. Such clause may too apply where fabric as well as labour utilization exceeds a item limit. In this case, however, contractor volition guide hold to testify that excessive utilization is non because of decrease inwards efficiency. The contractor allows a rebate inwards the bills presented past times him to the extent of the decrease inwards price.
c. Cost plus contract: the contract inwards which the contract cost is determined past times adding a sure pct of lucre on cost is known equally cost plus contract. The cost plus contract is adopted to overcome amongst work of fixing the contract cost terms caused due to nature of contract, duration of completion of contract, uncertainly of material, alter inwards the cost level, novel technology scientific discipline etc. this type of contract is mostly followed past times the authorities for production of especial articles non commonly manufactured, urgent repairs of vehicles, roads span etc. nether this types of contract, the contract starts the go as well as payment is made past times the contracted gradually on the footing of the cost incurred inwards the go completed plus sure pct of profit.
The similarities betwixt project club as well as contact costing are mentioned below:
• Both jobs as well as contracts are based on the specific requirements of customers. As a result, each project or contract is 'tailor-made' as well as in that place is no exact repetition of a project or contract.
• Both project as well as contract is terminal. Each project as well as contract tin endure identified from get to goal and, therefore, costs tin endure identified for each project a contract.
• The basic principles of contract costing are similar to those applied inwards project costing.
Types of contracts
There are 3 types of contract which are mentioned below:a. Fixed cost contract: the contract that is executed amongst the fixed cost which is agreed past times the contract as well as the contractee is called the fixed cost contract. Under this contract, no modification is made inwards the agreed contract cost irrespective of the changes inwards the cost degree of fabric as well as labour inwards feature. In such type of contract, the contractor is benefited when the cost of fabric as well as labour decrease. In contrary to this, the contractee is benefited if the cost of fabric as well as labour increase.
b. Fixed cost contract amongst escalation as well as de-escalation clauses: escalation clause is a of understanding that that aims to trim down the risks that is causes due to the changes inwards the cost of materials, labour as well as other services. Under this, the contract cost is adjusted inwards accordance, amongst the changes inwards the cost of material, labour as well as other services. The additional cost raised due to the increment inwards cost is born past times the contracted. Similarly, the contract cost is reduced if the cost decreases below a sure percentage. It is called de-escalation or contrary clause. Escalation clause condom guides the involvement of both the contractor as well as contractor against unfavorable cost alter inwards future. Such clause may too apply where fabric as well as labour utilization exceeds a item limit. In this case, however, contractor volition guide hold to testify that excessive utilization is non because of decrease inwards efficiency. The contractor allows a rebate inwards the bills presented past times him to the extent of the decrease inwards price.
c. Cost plus contract: the contract inwards which the contract cost is determined past times adding a sure pct of lucre on cost is known equally cost plus contract. The cost plus contract is adopted to overcome amongst work of fixing the contract cost terms caused due to nature of contract, duration of completion of contract, uncertainly of material, alter inwards the cost level, novel technology scientific discipline etc. this type of contract is mostly followed past times the authorities for production of especial articles non commonly manufactured, urgent repairs of vehicles, roads span etc. nether this types of contract, the contract starts the go as well as payment is made past times the contracted gradually on the footing of the cost incurred inwards the go completed plus sure pct of profit.
Preparation of a contract account
Under the contract costing, a dissever work organisation human relationship is opened for each contract so equally to ascertain the seat of lucre or loss. Such work organisation human relationship is called a contract account. All the expenses incurred inwards the contract similar material, wages, direct expenses, flora as well as mechanism etc. are debited whereas fabric returned, as well as fabric at end, flora at end, go inwards progress or contract cost inwards instance of completion of the contract etc. are credited inwards the contract account. The divergence betwixt the debit as well as credit represents the loss or profit. The lucre earned nether the completion of the contract is regarded equally cyberspace lucre or cyberspace loss inwards instance of loss. The lucre earned from the contract which is inwards progress or non completed is called notional profit. When loss takes house inwards such a situation, it is called cyberspace loss. It is because that a loss tin never endure notional, it is ever real. The specimen of a contract work organisation human relationship is presented below:
a. When contract is totally competed: approximately contracts are minor as well as tin endure completed within a year. In such a case, full contract cost is present on the credit side of the contract work organisation human relationship equally contracture's account. In this case, if credit is heavy as well as then balancing figure on debit side is called lucre as well as if the debit side is heavy, as well as then the residue figure on credit side volition endure called a loss.
b. When contract is incomplete: large contract accept divulge of years to completion. In this situation, amount of go certified as well as uncertified are flora inwards the contract. Such amount of go certified as well as uncertified should endure shown on the credit side of the contract work organisation human relationship nether the caput work-in progress account.
1. Work certified: the value of go completed as well as certified past times contractee's engineers as well as architchets is called go certified. As per provision of the contract, a fixed pct of such go certified is paid past times contractee to contractor. Some pct of go certified is retained money. The go certified included the share of notional lucre therefore, if the cost of certified is lower than the go certified, the dissimilar amount is called motioned ,profit, if the amount of cost of work certified is higher than the go certified, the dissimilar volition endure loss.
2. Work uncertified: on the appointment of training of contract account, in that place may endure approximately competed but uncertified work. The go of contract which is completed but non certified past times the engineers is called go uncertified. It is ever recorded at cost cost as well as non on contract prices so equally to avoid whatever lucre chemical ingredient inwards it. The go uncertified never includes the share of notional profit.
Treatment of materials inwards contract account
The procedures of recording materials inwards a contract work organisation human relationship are equally follows:
The procedures of recording materials inwards a contract work organisation human relationship are equally follows:
Treatment of flora inwards contract account
The mechanism used for a contract is recorded inwards a contract work organisation human relationship through ii ways. They are
i. The cost of mechanism as well as equipment to endure used for a longer menstruum or buy for the contract is shown inwards the debit side of a contract account. The mass value of the mechanism as well as equipment is shown inwards credit side. The mass value is calculated past times deducting the depreciation from the cost of the mechanism as well as equipment.
j. If the mechanism as well as equipment is used for a brusque fourth dimension inwards the contract, the amount of depreciation charged is alone debited inwards the contract account. In such a situation, the buy cost inwards the debited side as well as the mass value inwards the credit side are non shown. This is mostly done, if the flora as well as equipment are non used till the goal of te accounting period.
The treatments of flora as well as mechanism inwards a contract work organisation human relationship nether dissimilar atmospheric condition guide hold been presented below:
Methods of transferring profit
The lucre earned against the completion of a contract is assumed to endure the cyberspace lucre as well as transferred to lucre as well as loss account. Generally, a contract is completed inwards a long-period of fourth dimension as well as the profit/loss is to endure calculated at the goal of each accounting period. Out of the national lucre i.e. the lucre earned during the go inwards progress, alone approximately share is to endure transferred to lucre as well as loss account. The during the go inwards progress, alone approximately share is to endure transferred to lucre as well as loss account. The remaining share of the notional lucre is transferred to reserve. Therefore reason. There are approximately factors which are to endure considered to transfer the proportion of notional lucre to lucre as well as loss work organisation human relationship as well as reserved. They are:
a. Work certified: the go of a contract completed past times a contractor is supervised as well as certified past times the engineer of the contractee. The share of the go completed as well as certified past times the contractee is called the go certified. The go completed but non certified due to dissimilar treasons is called the go uncertified. Work certified is i of the bases of transferring the national lucre to the lucre as well as loss account.
b. Cash received: the contractor received cash from the contracted depending on the degree of go completed. He/she received cash on the footing of go certified. The whole amount of go certified is non paid to the contractor. The share of go certified that is non paid to the contractor is known equally retentivity money. The human relationship betwixt the go certified as well as cash receipts is shown below:
Cash received (Rs.) = go certified x % of cash received
% of cash received = 100% - Retention rate
Wok certified = cash received (Rs.) x 100/ % cash received
The ways of transferring notional lucre as well as loss work organisation human relationship are given below:
a. Transfer of lucre of incomplete contracts
The methods of transferring the motioned lucre when is inwards profess are given below:
b. Transfer of lucre if contracts are nigh completed
The contact inwards which it is possible to justice the of contract completion as well as characteristic cost to endure incurred to completed the go as well as to a greater extent than than 90% of the go has been completed is called the nigh completed contract. The methods of ascertainment of lucre as well as transferring the lucre as well as loss work organisation human relationship are given below:
The lucre earned against the completion of a contract is assumed to endure the cyberspace lucre as well as transferred to lucre as well as loss account. Generally, a contract is completed inwards a long-period of fourth dimension as well as the profit/loss is to endure calculated at the goal of each accounting period. Out of the national lucre i.e. the lucre earned during the go inwards progress, alone approximately share is to endure transferred to lucre as well as loss account. The during the go inwards progress, alone approximately share is to endure transferred to lucre as well as loss account. The remaining share of the notional lucre is transferred to reserve. Therefore reason. There are approximately factors which are to endure considered to transfer the proportion of notional lucre to lucre as well as loss work organisation human relationship as well as reserved. They are:
a. Work certified: the go of a contract completed past times a contractor is supervised as well as certified past times the engineer of the contractee. The share of the go completed as well as certified past times the contractee is called the go certified. The go completed but non certified due to dissimilar treasons is called the go uncertified. Work certified is i of the bases of transferring the national lucre to the lucre as well as loss account.
b. Cash received: the contractor received cash from the contracted depending on the degree of go completed. He/she received cash on the footing of go certified. The whole amount of go certified is non paid to the contractor. The share of go certified that is non paid to the contractor is known equally retentivity money. The human relationship betwixt the go certified as well as cash receipts is shown below:
Cash received (Rs.) = go certified x % of cash received
% of cash received = 100% - Retention rate
Wok certified = cash received (Rs.) x 100/ % cash received
The ways of transferring notional lucre as well as loss work organisation human relationship are given below:
a. Transfer of lucre of incomplete contracts
The methods of transferring the motioned lucre when is inwards profess are given below:
b. Transfer of lucre if contracts are nigh completed
The contact inwards which it is possible to justice the of contract completion as well as characteristic cost to endure incurred to completed the go as well as to a greater extent than than 90% of the go has been completed is called the nigh completed contract. The methods of ascertainment of lucre as well as transferring the lucre as well as loss work organisation human relationship are given below:
Some other items used inwards costing account
a. Labour cost: all the workers engaged at the site of a item contract, irrespective of the nature of the go performed past times items, are treated equally direct workers as well as the amount of reward paid to them equally direct wages. Such reward are to endure charged to the item contract directly. In instance a worker (generally the supervisory staff) is engaged at ii or to a greater extent than contracts, his full reward may endure apportionment to dissimilar contract on the footing of fourth dimension devoted to each contract or on another equipment basis' reward accrued or outstanding at the goal of the accounting menstruum should look on the debit side of the contract account.
b. Direct expenses: all expenses (other than fabric cost as well as direct wages)
which guide hold been incurred specifically for a item contract are direct expenses as well as shall endure debited to contract a/c. instance of direct expenses are: hither charges of especial flora (not owned), wagon on materials purchase, travelling expenses relating to contract, etc.
c. Indirect expenses: in that place are sure expenses, which cannot endure straight charged to a item contract e.g., salary of full general manager, salary of architect engaged at a divulge of contract simultaneously, salary of storekeeper, expenses of shop as well as purpose expenses. Since these expenses are incurred for the work organisation equally a whole, they are to endure apportioned to the dissimilar contract on approximately equitable basis.
d. Cost of sub-contracts: generally, the go of a specialized grapheme e.g., route structure inwards a building, installation of lifts, electrical fittings, is passed on to another contractor past times the top dog contractor. In such cases, the go performed past times the sub-contractor forms a direct charged to endure contractor concerned as well as the sub-contractor cost paid shall endure debited to contract account.
e. Cost of extra work: sometimes, inwards instance of a contract, approximately additional go o variations of the go originally contracted for may endure required past times the contractee. Since the additional go required volition non endure covered past times the terms as well as status of master copy contract, it volition endure the dependent champaign of a dissever charge., if the additional go required past times the contractee is quite substation, it should endure treated equally a dissever contract as well as dealt amongst inwards a dissever work organisation human relationship to endure opened for it. But inwards instance the additional go is non substantial, the expenses incurred on extra go should endure debited to contract work organisation human relationship equally 'cost of extra work' as well as the extra amount which the contractee has agreed to pay to the contractor should endure added to the master copy contract price.
f. Contract price: the contract cost is the agreed cost at which the contractor undertakes to execute to contractor. The contractor work organisation human relationship is credited amongst the contractor cost if it has been completed. In such a case, the amount of contract cost is debited to the 'contractee's personal work organisation human relationship as well as credited to the 'contract account'. No entry is passed inwards honor of the contract cost inwards instance of incomplete contracts.
g. Retention money: generally, the terms of the contract render that the whole of the amount shown past times the archive's certificate shall non endure paid to the contractor but a specified pct or share coin (say 10% or 20%) thereof shall endure retained past times the contractee till the contract. Te coin so retained is known equally 'Retention money'. The cash received from the contractee is credited to his personal account. The value of go (certified as well as uncertified) is debited to work-in progress account. The work-in-progress work organisation human relationship is shown equally an property inwards the residue sail subsequently deducting the amount received from the contractee. In the kickoff of the adjacent twelvemonth the work-in-progress work organisation human relationship is transferred to the debit side of the contract account. On contest of the contract, the contractee's work organisation human relationship is debited as well as contract work organisation human relationship is credited past times full contract price.
1. What is contract account? Mention its features.
Contract costing is a shape of project costing inwards which a dissever ledger i.e. contract ledger is maintained for each job. It is too known concluding costing equally the contract work organisation human relationship is terminated or unopen subsequently the completion of the go or contract. The top dog objective of the contract costing is to ascertain the full cost of contract so equally to known the lucre or loss incurred from the contract.
The top dog features of contract work organisation human relationship are mentioned below:
a. Contract are executed or performed at the sites which are mostly out of the contractor's premises.
b. Most of the contracts involve jobs having large size as well as amount.
c. The duration of the completion of a contract may become beyond i accounting year.
d. Each contract is treated equally a dissever unit of measurement of cost for the purpose of cost ascertainment.
e. The contract are executed equally per the agreed specifications provides past times the contractee.
2. What is meant past times cost plus contract as well as escalation clause?
Cost plus contract: the contract inwards which the contract cost is determined past times adding a sure pct of lucre on cost is known equally cost plus contract. The cost plus contract is adopted to overcome amongst work of fixing the contract cost caused due to nature of contract, duration of completion of contract, uncertainly of material, alter inwards the cost level, novel technology scientific discipline etc. nether this types of contract, the contractee gradually on the footing of the cost incurred inwards the go completed plus sure pct of profit.
Escalation clause: it is a clause of understanding that aims to trim down the guide chances is caused due to the changes inwards the cost of material, labor as well as other services. Under this, the contract cost is adjusted inwards accordance, amongst the changes inwards the cost of material, labour as well as other services. The additional cost rose due to the increment inwards cost of material, labour as well as other services. The additional cost raised due to the increment inwards cost is borne past times the contractee. Similarly, the contract allows a rebate inwards the bills presented past times him to the extent of the decrease inwards price.
3. Write whatever 5 differences betwixt project club costing as well as contract costing.
The dissimilar betwixt project club costing as well as contract costing are mentioned below:
a. Size: The works perform nether project club costing is comparatively minor inwards size but the go performed nether contract costing is larger inwards half dozen that the project order.
b. Place of work: inwards project club costing, the manufacturing of production is carried out within the mill premises but the production or structure go is carried out at site inwards contract costing.
c. Time: project club costing takes comparatively lesser fourth dimension to consummate the go whereas contract costing takes a longer fourth dimension to consummate a contract, fifty-fifty to a greater extent than than an accounting period.
d. Payment of price: the cost nether project club is paid subsequently the completion of project but nether a contract, it is gradually paid inwards dissimilar installment earlier the completion of the work.
e. Investment: preliminary investment is asserts is comparatively higher inwards contract costing than project club costing.
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