BBA Study Material to Cost Accounting Topic Wise Notes of Contract Costing : BBA Most Important Free Online Books Cost Accounting and Topic Wise / Chapter Wise Notes Study Material in English (PDF Download)
Bba study Material of Cost Accounting short notes of Contract Costing: After studying in this Post, You are able to understand a Bba Cost Accounting of Contract costing topic is:- Bid Costing, Cash Received, Contract, Contract Costing, Contract Nearing Completion, Cost Plus Contract, Escalation Clause, Estimated Profits, Fixed Price Contract, Job Costing, Retention Money, Surveyor’s Certificate, Work Uncertified, Work-in-Progress.
Learning objectives After studying this chapter, you are able to understand:
- Features Of Contract Costing
- Accounting Procedure In Contract Costing
- Transfer Of Profit On In Complete Contracts
- Transfer Of Profit On Contracts Nearing Completion
- Ascertainment Of Work – In – Progress
- Surveyor’s Certificate And Retention Money
- Distinction Between Job Costing And Process Costing
- Special Features Of Cost Plus Contracts
- Distinction Between Bid Costing And Cost Plus Contracting
- Fixed Price Contracts With Escalation Clause
Bba study Material to Cost Accounting, Definition and Meaning of Contract Costing
Definition and Meaning
CIMA defines contract cost and contract costing as follows:
“Contract cost is the aggregated costs relative to a single contract designated a cost unit”.
“Contract costing is that form of specific order costing which applies where work is undertaken to customers’ special requirements and each order is of long – term duration”.
Contract costing is a specialised system of job costing applies to long – term contracts as distinct from short – term jobs. Contract costing is mainly applied in civil construction and engineering projects, ship building, road railway lines contracts, construction of bridges etc. contract costing is a form of specific order costing. It is applied to contracts where substantial time is taken to complete the contract and it falls into different accounting periods. However, a duration of exceeding one year is not an essential feature of a long – term contract. Some contracts with a shorter duration than one year should be accounted for as long – term contracts if they are sufficiently material to the activity of the period.
Features of Contracts –
The contracts for which contract costing is applied will have the following features:
- Contracts are undertaken to special requirements of the customers.
- Duration of contracts are relatively for a long period.
- Contract work is done on the sites unlike manufacturing under a roof.
- Contract work mainly consists of construction activities.
Bba study Material to Cost Accounting of Contract Costing Topic is Job Costing and Contract Costing: Distinction short notes
Job Costing and Contract Costing: Distinction
The important distinguishing features of job costing and contract costing are given below:
- Job work is carried in the premises.
- An order, a unit, lot or batch of product may be taken as cost unit.
- Cost is first allocated to cost centres and then charged to individual jobs. It is a system of costing in which the elements of cost are accumulated separately for each job or work undertaken by an organisation.
- The prices of the jobs are fixed basing on the nature of costs and policy of the firm.
- The duration of the job work is smaller.
- The value of the job work is lesser.
- Contract work is carried at site.
- Each contract is a cost unit.
- Most of the expenses are of direct nature and are directly charged to respective contract accounts. Only general overheads and head office expenses are apportioned to individual contracts.
- The pricing is generally through bidding and external forces have major influences in fixing the offer prices.
- Generally the contract works will take more time to complete.
- The contract works are bigger in nature and the value of the contract would also be higher.
Bba Study Material to Cost Accounting of Contract Costing topic is Accounting Procedure in Contract Costing short notes
Accounting Procedure in Contract Costing
If the numbers of contracts are more, a distinguishing number or name is given to each contract for accounting and administration convenience. A separate contract account is maintained for each contract. All costs relating to contracts are charged to the respective contract accounts. In the contract cost structure majority of the expenditure is of direct nature in the form of materials, wages, use of plant and stores, direct expenses etc., and only a small portion will be charged as apportioned overheads. Accounting of each item of cost in contract accounts is discussed below:
- All the materials purchased for the contract or any material sent to site is charged to contract.
- If any material is returned to stores or lying at site unused or materials transfers to another contract site is credited to the contract account.
- It material are not required immediately, the materials may be stored and its costs is debited to stock account.
- All the labour employed or worked at site is treated as direct labour and all costs relating to them is charged to the contract account. The salaries and incentives of the administrative and supervisory staff of a specific contract is also charged to that specific contract.
- When the plant is taken on hire, the hire charges are charged to contract account.
- If the plant is specifically purchased for the contract or plant was sent to site, the value of the plant is debited to contract account. The value of plant returned or remaining at site is credited to contract account. the balance between amounts debited and credited to contract represents the value of plant used at site.
- Sometimes the value of depreciation provided on the plant is debited to contract account instead of showing the value of plant issued to site and remaining at site.
Sub – contract charges
- Sometimes part of the contract work is given on sub – contract basis and payments made on sun – contract work is debited to contract account.
- The general overheads and head office expenses are apportioned to different contracts on equitable basis, and the portion of overheads are charged to the contract account.
Difficulties in Cost Control
Generally, contracts are big in size and the contract work is to be carried out at sites. Due to this some problems will arise concerning usage of material, labour utilisation, supervision of labour, damage to plant and work, pilferage of materials and tools etc. this site based work make it difficult to control the costs of the contract.
Bba Study Material to Cost Accounting of Contract Costing Topic is Surveyor’s Certificate and Retention Money Shots Notes
Surveyor’s Certificate and Retention Money
In contract works, a surveyor or an architect or civil engineer is appointed to periodically visit the site for inspection of the work completed. He will issue a certificate mentioning the stage of completion of work and the value of the work completed to the date of issue of certificate. The payments will be released to the contractor by contractee based on the said certificate. Normally the payments will be released only to the certain percentage, say 80% of the work certified. The balance amount of work certified is retained by the contractee till the completion of the entire contract satisfactorily. The amount so retained is called ‘retention money’. The contractee so retains to safeguard himself from the risks that may arise from the contractor. Usually the percentage of retention money is upto 20% of the amount of work of work certified.
Bba study Material to Cost Accounting of Contract Costing topic is Work – in – Progress
Work – in – Progress
The amount of work – in – progress includes the value of work certified and uncertified appearing in the contract account. The work – in – progress is shown as current asset in the balance sheet as follows: