Login Get started

Contract Costing | One Shot | Cost Accounting | Palak Sharma

CMA Junction・2 minutes read

Contract work involves less volume but longer time periods, with job costing utilized for shorter tasks and contract costing for longer projects involving payment divisions, retention money, certifications, escalation clauses, and profit calculations based on completion and expenses, using four formulas to determine proportionate expenses and profits. Specific scenarios for profit calculation are detailed, emphasizing the importance of accurate accounting practices for work certification, expenses, notional profit, and profit and loss account transfers based on certified work values, contract prices, and cost completion estimates.

Insights

Contracts and jobs differ in terms of volume and variety, with contract work involving longer time periods and less volume compared to job costing.
Retention money is kept in contracts to ensure work completion, and work must be certified to receive payment, emphasizing the importance of following specific payment procedures.
Escalation clauses are included in contracts to account for price increases, impacting the overall contract price and financial calculations.
Notional profit, estimated profit, and specific formulas play a crucial role in determining profit distribution and transfer to the profit and loss account, highlighting the complexity and detailed calculations involved in contract costing.

Get key ideas from YouTube videos. It’s free

Recent questions

What is the difference between contracts and jobs?
Contracts involve longer periods and less volume.

Related videos

Summary

00:00

Contract vs Job: Volume, Variety, Payment.

Contracts differ from jobs in terms of volume and variety.
Taylor's example illustrates how each customer's requirements vary.
Contract work involves less volume but longer time periods.
Job costing is used for shorter tasks, while contract costing is for longer projects.
Contract costing involves dividing work into parts for payment.
Retention money is kept to ensure work completion in contracts.
Work must be certified to receive payment in contract costing.
Escalation clauses are included in contracts to account for price increases.
Notional profit is calculated based on work completion and expenses.
Estimated profit is determined by subtracting expenses from the contract price.

14:47

Calculating Profit and Expenses in Construction Projects

Money in hand can only be shared if it doesn't exist.
Work done equals 50, but it's the 90th day, so more work is needed.
2/3 of notional profit multiplied by cash received upon work certified will be transferred to profit and loss account.
Estimator profit determines the transfer to PNL account when the contract is almost completed.
Four different formulas are used to calculate proportions for expenses and cash received upon contract price.
Work certified upon contract price, cash received upon contract price, expenses, and proportion of expenses are crucial in calculations.
Notional profit is calculated by subtracting expenses from certified work value.
Notional profit is divided into PNL account and work in progress based on work certified percentage.
Year two involves recording material, labor, and expenses costs, as well as calculating work in progress and construction costs.
Work certified, work uncertified, and expenses incurred are essential in determining the value of work in progress.

30:21

Calculating Profit and Expenses in Construction Project

The cost of uncertified work is calculated at 000.
Conceptual profit is determined by subtracting 4000 from the total income earned.
Notional profit is calculated to be 9000, with a total of 13000.
9000 is transferred to the PL account, with the remaining amount credited to the progress account.
40 units of work have been certified.
A provision for 6600 is made.
Expenses incurred include material and labor costs of 2500 and 500, respectively.
The estimated cost for remaining work is 2000.
The total work certified is at 90.
The estimated profit is calculated by subtracting the total expenses from the contract price.

49:01

Construction Costs and Profit Analysis Summary

The work in progress account shows a cost of construction of 17416.
Part five of the work has been certified, amounting to Rs 27000.
The cost of work uncertified is calculated as 916.
The notional profit is determined to be 10500.
The estimated profit is calculated as 10584.
The amount to be transferred to the profit and loss account is 7620.
The total amount transferred to the profit and loss account over five years is 18500.
The company received 1440000 for 90% of the work certified, totaling 16 lakhs.
The cost of work uncertified is 40000.
The notional profit is calculated as 240000, with 72000 to be transferred to the profit and loss account.

01:07:59

Calculating Profit in Various Contract Scenarios

Four formulas are provided to calculate profit based on different scenarios.
The first formula involves estimating profit by multiplying work certified by contract price.
The second formula calculates profit by multiplying cash received by contract price and dividing by total contract price.
The third formula determines profit by multiplying estimated profit by total cost to date divided by total estimated cost.
The fourth formula involves estimating profit by multiplying estimated profit by total cost to date divided by total estimated cost.
The text emphasizes the importance of following specific formulas based on the given scenarios.
A detailed example is provided for each formula to illustrate the calculation process.
The text transitions to a new scenario involving a contract with incomplete information.
Instructions are given to calculate estimated profit on completion of the contract based on current expenses and contract price.
The process involves subtracting total expenses from the contract price to determine estimated profit.
The text concludes with a different scenario involving a contractor's books and the calculation of notional profit based on expenses and work certified.

01:25:46

Construction Profit Calculation and PNL Transfers

Notional profit calculation involves work in progress worth Rs 2825 and Rs 5000, minus construction cost of 208000 and 750, resulting in a notional profit of 78750.
To calculate the amount to be transferred to the PNL account, the work in progress amount is considered, leading to a transfer of 47250 to the PNL account.
The work in progress amount of 31000 will be transferred to the account, with the remaining amount to be shown in the next year's balance.
The value of certified work is 28200, with a contract price of 375000, resulting in a calculation of 2825/375000.
The expected cost of completion is calculated by dividing the cost of construction by the percentage of completion, resulting in 26610.
The cost of work certified is found to be 13095, while the cost of work uncertified is calculated as 4465.
The notional profit is determined to be 6695, which will be transferred to the PNL account.
The amount to be transferred to the PNL account is calculated as 3568, based on the percentage of certified work and cash received upon work certified.
The contractor closes their books every year in December, following a time period from January to December, despite commencing work in April.
The contractor's costing records reveal material, labor, and machine costs, with depreciation calculations and supervisor expenses detailed for accurate accounting.

01:43:30

Construction Costs and Financial Transactions Summary

Total cost of construction is Rs. 115,000, with Rs. 11,000 being the cost after deducting Rs. 450 and Rs. 550.
Work certified amounts to Rs. 150,000, which will be crucial later on.
Cost of construction can be reduced by Rs. 15,000, bringing it down to Rs. 114,000.
Work certified value is Rs. 150,000, while cost of work uncertified is not specified.
Notional profit of Rs. 11,500 is earned, with a part of the contract being completed.
Finished part of the contract is transferred to the contract account, totaling Rs. 22,500.
Remaining balance after deductions is Rs. 88,000, which is transferred to the uncertified account.
Cash received from the contract amounts to Rs. 55,000, serving as the opening balance for the year.
Advance received from the contract is Rs. 40,000, with the total balance being Rs. 72,500.
Work in progress is calculated as Rs. 30,500, considering certified and uncertified values.

01:59:08

Construction Contract Financial Analysis

Notional profit is calculated at Rs 80,000, with a certified work value of Rs 3 lakhs.
The contract price is Rs 5 lakhs, with certified work worth Rs 3 lakhs, resulting in a 60% ratio.
2/3 of the notional profit is transferred to the PNL account, calculated by multiplying it by the cash received upon work.
A contingent provision of Rs 32,000 is made, with the remaining amount going to the WIP account.
Depreciation is charged on a plant worth Rs 2 lakhs used for 9 months, resulting in Rs 15,000.
Material costing Rs 4,000 and wages of Rs 18,000 are accounted for, along with plant expenses of Rs 45,000.
Work certified at 80% of the total contract value of Rs 6 lakhs results in a certified value of Rs 4,80,000.
Uncertified work worth Rs 15,000 contributes to the notional profit calculation, totaling Rs 90,000.
23% of the notional profit is transferred to the PNL account, with the remaining amount going to the WIP account.
The balance sheet includes building value of Rs 1,60,000, creditors at Rs 7, bank balance of Rs 35,000, and capital account at Rs 5 lakhs.

02:15:04

Deductions and Receivables in Accounting Analysis

Subtract the provision on the liability side from the IP on the asset side, resulting in a deduction of 45000.
The remaining amount after the deduction is 480000.
The pass amount is 50000.
The cash received is 3 lakhs, while the work certified is 480000 at 75, equating to 360000.
Despite the work certified being 360000, only 3 lakhs were actually received.
After subtracting the cash received, the remaining amount is to be determined.
The total recorded amounts include 72000 for creditors, 5 lakhs for capital, and 32000 for building.
The total material cost is 30000, with an additional 4000 for material on-site.
The escalation clause in the contract leads to a price increase of 25, resulting in a contract price of 5000.

Try it yourself — It’s free.