Contract costing is a system of job costing that is applied to relatively large cost units, which normally take a considerable length of time to complete. Building and construction work, civil engineering and shipbuilding are some examples of industries where large contract work is undertaken, and where contract costing is appropriate.
Contract Costing deals with the books of the Contractor only, i.e. the cost of the work and measuring the profit or loss on the contract. Contract costing is governed by IAS 11. Features of long term contracts
1.By contract costing situations, we tend to mean long term and large contracts: such as civil engineering contracts for building houses, roads, bridges and so on. We could also include contracts for building ships, and for providing goods and services under a long term contractual agreement.
2.With contract costing, every contract and each development will be accounted for separately; and does, in many respects, contain the features of a job costing situation.
3.Work is frequently site based and takes a long time to complete & may spread over two or more of the contractor’s accounting years.
Accounting Considerations
-Contract Account
-Contract Profit and Loss Account
-Contractee Account (e.g. Government of Jamaica)
-Balance Sheet Extract
The Essay on Ethical Issue of Long Work Hours
Today, long work hours have become a significant issue. For employees’ health and the normal operation of the society system, ethical issue of long work hours should be cared more. Countless evidence shows that long work hours increase the workers’ risks for injury and disease. For instance, a research by American government estimates that long work hours increase the possibilities for injuries by ...
Contract Account
A separate account will be kept for each contract with the general objective of establishing the overall contract profit or loss. To do this the following entries are required: Contract Account
Typical Debit EntriesTypical credit entries
Direct costs (Material, Labour)Credit Plant, Materials transferred from Contract Direct expenses (Plant hire, Sub- contractors. Architects’ fees, etc.)Material, plant c/d
Cost of Plant boughtCost of work certified (cost of sales)
Debit any materials, plant etc, transferred to contractCost of work not certified (WIP c/d value of contract) Debit Head Office Charges
In addition there are, of course, contra entries within the contract account relating to carry forward/brought forward items, accruals and prepayments.
Contract ‘Plant’
A feature of most contract work is the amount of plant used. This includes cranes, trucks, excavators, mixers and lorries. The usual ways in which plant costs are dealt with are as follows:-
(a) When plant is leased –The leasing charges are charged directly to the contract.
(b)When plant is purchased. There are two methods in common use.
i.Charge new plant at cost to the contract for which it was purchased. When the plant is no longer required and is transferred to another contract or base, the original contract would be credited with the second hand value (NBV @ date of plant transfer).
In this way the contract bears the charge for the depreciation incurred. Another option would be to just charge the depreciation for the period to the contract account (debit entry).
ii.Where plant is moved frequently from contract to contract or where contracts are relatively short, a “Plant Service Department” is created. This department organises the transfer of plant from contract to contract as required and each contract is charged a daily or weekly rental.
Note: Whatever method is used for charging the capital costs of plant, the ordinary running costs, fuel, repairs and insurance would be charged directly to the contract.
The agreed retention rate is 10% of the value of work certified by the con-tractee’s architects. Contract C is scheduled for handing over to the contractee in the near future, and the site engineer estimates that the extra costs required to complete the contract, in addition to those tabulated above, will total $305,000. This amount includes an allowance for plant depreciation, construction services and for contingencies.
The Term Paper on Contracts And Redundancy Employee Employer Work
In order to claim a redundancy payment an employee must first establish that he has been dismissed and second that the dismissal is for reasons of redundancy. This will encompass all aspects of the decision, therefore it brings in contractual issues in relation to the dismissal as well as in relation to the definition of redundancy. In Saunders v Earnest A Neale Ltd (1974) the employees conducted ...
Contract Profit and Loss Account
Guidelines on calculating interim profits
Various possibilities exist for estimating the profit on incomplete contracts and several options are shown below. However a prudent view must always be taken and the profit should reflect the degree of completion. You are recommended to adopt the following guidelines:
1.If the contract is at an early stage (say, less than 35% complete) no profit should be taken. Interim profits, however calculated, should only be taken when the final contract outcome can be assessed with reasonable confidence.
2.If a loss is incurred, the prudence concept should be applied, and the total loss should be recognized in the period in which it is incurred. Where further additional future losses are anticipated, all of the loss should be recognized as soon as it is foreseen and added to the cost of sales.
3.Substantial costs have been incurred
When substantial costs have been incurred (say the contract is 35% – 85% complete) a formula which has traditionally been used in the construction industry is:
Formula for contract 35 – 85% complete
Profit taken = 2/3 of the Notional Profit Xcash received from progress payments value of work certified
Where the Notional Profit is Value of Work Certified – Cost of Work Certified.
4.Contract Nearing Completion – (say, over 85% complete)
When the contract is nearing completion (say, over 85% complete) and the eventual profit can be assessed with reasonable certainty there is no need for excessive prudence and one of the following methods may be used:
a.Formula for contract 85% and over complete and there is a Contract Retention Percentage Profit taken =Progress payments to dateX estimated total profit on completion
contract price
b.Formula for contract 85% and over complete and there is NO Contract Retention or progress payment In the unlikely event of there being no retention or progress payment by the client the formula would be:
School Facilities Work On The Weekend
Students on the NC State campus are not allowed to have access to the gym and music center facilities at peak hours of boredom during the weekend. During the week while the student's are hurrying to and from classes, they are busy, hard working, and tired of the stress that comes along with balancing academics in college. When the weekend comes around, everyone should be allowed to have a way to ...
Profit taken =Value of work certified X estimated total profit on completion contract price
c.Completed Contract Formula
This formula must be used in the final year when a contract is complete.
Profit taken =Value of work certified – Cost of work certified
LQ Solution Continue “Contract P&L Account”
[1]Calculate the stage/degree of completion for each contract Surveys of work performed methodABC
Stage of Completion =
Value of Work Certified
Contract Price200
1760 = 11%860
1485 = 58%2100
2420 = 87%
[2]Calculate whether each contract has made a loss to date or is expected to make an overall loss.
For contracts where costs to the end of the contract term is not readily
available use the following formula:
Profit or loss to date = Value of work certified – Cost of work certified to date
