Contract Costing

CONTRACT ACCOUNT
Contract No. ...... for the year ended
Contract
Pafticularc Rs. Pafticularc Rs.
To Materials (Issued) By Work in Progress:
To Wages (Paid + Payable) -
Work Certified
To Direct Expenses -
Work Uncertified
To Indirect Expenses By balances c/d:
To Sub{ontract Costs - Materials at Site
To Cost of Etra Work - Plant (WDV) at site
To Plant (at Cost)
To Notional Profit - balancino fioure
Total Total
To Profit and Loss Account - transfer of By Notional Profit bld
profits recognised during the period
To Reserve Profit - balancino fioure
Total Total
To Work in Progress b/d By Reserue Profit b/d
To balances b/d
- Materials at Site
- Plant at Site
The Contract Account is generally prepared in three segments. They are -
1. First Segment: Initial Comparison of Incomes & Expenditures for the period, leading to Notional Profit.
2. Second Segmenh Recognition and Transfer of a portion of Notional Profit to P & L Account and the balance carried
forward as Reserve Profit.
3. Third Segments Carry forward of balances from one financial period to another. Hence Third Segment of the previous
period becomes the First Segment of the next financial period. [Note that the Third Segment is not totalled, it is only
the carry forward of account balances from one period to the other.

.tg. t*ory b WtP rtisplqpd in te Balance Stwet tiil a cmEact is compbted?

CURRENT ASSETS: Contract Work-In-Progress

Gtue of Work Certified
Add: Cost of Work Unceftified
Add: WDV of Plant at Site
Add: Cost of Materials at Site
SutsTotal
Less: Reserue Profit
Net Balance
Less: Balance in Contractee's Personal
Net Value of Contract WIP

6.19
Students'Handbook on Cost Accounting and Financial Management

A Contract is estimated to be 80% complete in its first year ol construction as certified. The Contractee pays 75o/o ol Value of
Work Certified, as and when certified and makes the final payment on the completion of contract. The lollowing information is
available for the first year -
. Cost of Work -in-Progress Uncertified Rs. 8,000
o Profit transferred to Profit & Loss A/c at the end of Year I on incomplete contract Rs.60,000
. Cost of work to date Rs.88,000

Calculate the Value of Work-in-Progress Certified and ahe amount of Contract Price.

Solution:
Cash Re ceived
1. Since contract is 800/o complete, Profit transferred to P & L A/c ,3= Z x Notional Profit x Work Certified
r\
So, Rs.60,000 = 1x Notional Profit x75o/o (i.e. Percentage of Cash Received to Work Certifled is 75olo given)

On solving the above, we get Notional Profit = Rs.1,20,000.

2. Notional Profit = Work Ceftified + Work Uncertified less Cost of work done till date
Rs.1,20,000 = Work Certified + Rs.8,000 - Rs.88,000
On solving the above, we get Work Certified = Rs.2rOOrOOO.

3, o/oaQ€ of Completion =
Work Ceftified Rs.2,00,000
= 8oo/o. so, contract price =
Rs'?'-0-g'000
= Rs.2rsorooo.
Contract Pr ice Contract Pr ice 80o/o

rlffi sit*lntffiltffi,gnffinwithNdiondPrufit,.BalancesmtetmaA ': " ": ' """'ilt00

The following details are available from the books of accounts of a Contractor with respect to a particular construction work for
the vear ended 31st March
Particulars Rs. Particulars Rs.
Contract Price Material returned to Store
91,00,000 14,840
Cash Received from Contractee (90% of Work Certified) Head Oflice Expenses apportioned
71,91,000 2,50,000
Material sent to site Cost of Work Uncertified
35,82,600 3,17,000
Planning and Estimation Cost 0n 31et March:
3,50,000
Direct Wages paid 32:,,62,700 Material at site 85,400
Cost of Plant installed at site 7,00,000 Accrued Direct Wages 78,120
Direct Expenses 1,68,000 Accrued Direct Expenses 9,310
Establishment Expenses 2.03.000 Value of PIant (as revalued) 6.16.000
Required: (1) Prepare the Contract Account for the year ended 31st March. (2) Show the relevant Balance Sheet entries.

Solution: st
l.ContractAccountforthevearended3l*March
Particularc Rs. Pafticularc Rs.
To Materials 35,82,600 By Work in Progress A/c
To Direct Wages Paid 32,62,700 Rs'71'91'ooo
Add: -work certified ( ))
Payable_Z&lZQ 33,40,820 90o/o 79,90,000
To Direct Expenses Paid 1,68,000 -Work Unceftified 3,17,000
Add: Payable 9,310 1,77,310 By Materials - returned to Stores L4,84iO
To Planning and Estimation 3,50,000 By Materials at Site 85,400
To Cost of Plant installed at site 7,00,000 By WDV of Plant at site 6,16,000
To Establishment Expenses 2,03,000
To HO expenses - appoftioned 2,50,000
To Notional Profit - balancino fioure 4,19,510
Total 90,23,240 Total 90,23,240

6.20
 Particularc Rs. Pafticularc Rs.
To P & L,Vc - Profit transfer - See Note b 2,51,706 By Notional Profit b/d 4,19,5t0
To Reserve Profit c/d - balancinq fiqure 1,67.804
Total 4,L9,sLO Total 41191510
To Work-in- Progress b/d (WC+WUC) 83,o7,ooo By Reserue Profit b/d 1,67,804
To WDV of Plant at site b/d 6,16,000
To Materials at Site b/d 85.400
Notes:

(a) percentase of complel;on = ]1l $ttifel = S 1?'?9'999 = Bt.Boo/o

Contract ice Rs.g1,00,000
Pr

(b) So, Profittrfd to P&L *r= tx Notionat Profit xffiffi =3x Rs.4,1e,510 x-S### = Rs.2,51,706

2. Balance Sheet as on March

Liabilities Rs. Assets Rs.
Fixed Assets:
Profit and Loss A/c 2,51,706 Current Assets: Contract Work-in-Progress
(Note: Overall Net Profit of the Company Work Ceftified 79,90,000
will be determined after debiting Period Work Uncertified 3,17,000
Costs, Unallocated HO Costs, Interest, Tax, Plant (WDV) at Site (See Note a) 6,16,000
etc. in the General P&L A/c.)
Materials at Site 85,400
Sub-Total 90,08,400
Current Liabilities: Less: Reserve Profit (or Profit-in-Reserve) (1,67,804)
Wages Accrued 78,120 Net-Total 88,40,596
Direct Expenses Accrued 9,310 Less: Contractee! Account balance (71,91,000)
Net Value of Contract ltlflP 16,49,596
Total Total
Note:
(a) WDV of Plant at site can also be shown under the heading "Fixed Assets".
(b) The above is only an extract of the Balance Sheet. Hence, Totals are not drawn up.

Modern Constructions Ltd obtained a contract No.B-37 for Rs.40 Lakhs. The following balances and information relates to the
contract for the veat iust ended -
Particulars At the beqinnino ol the vear Rs. At the end of the vear Rs.
Work-in-Progress: Work Certified 9,40,000 30,00,000
Work Uncertilied 11,200 32,000
Materials at site 8,000 20,000
Accrued Waqes 5,000 3.000

Additional information relatinq to the vear are

Particulars Amount Particulars Amount
Materials issued from Stores Rs.4,00,000 lndirect Expenses Rs.10,000
Materials directly purchased Rs.1,50,000 Share of General Overheads for B-37 Rs.18,000
Wages paid Rs.6,00,000 Materials returned to Supplier Rs.15,(X)0
Architect's Fees Rs.51,000 Fines and Penalties paid Rs.l2,000
Plant Hire Charqes Rs.50.000 Materials returned to Stores '
Rs.25,000

The Contractee pays 80o/o of Work Certified in cash. You are required to prepare -
o Contract Account showing clearly the amount of profits transferred to Profit and Loss Account,
r Contractee's Account, and
o Balance Sheet.

6.21
 Students'Handbook on Cost Accounting and Financial Management

Solution: 1. Contract No.B-37 Account for the ended ..,....

Pafticulars Rs. Palticulars
To balance b/d - Work Ceftified 9,40,000 By Work in Progress"- Work Cedified
- Work unceftified 11,200 -"Work ijncertified 32,0011
To Material at Site b/d 8,000 By Materials Re!"urns * Stores 25,000
fo Material issued 4,00,000 - $upplier 15,000
To Wages (6,00,000 + 3,000 - 5,000) 5,98,000 Note: It rrned tirat Materials are returned
is assurner
To Architects' Fees 51,00c to Supplier
:lier, directly from the Site itself.
To Plant Hire Charyes 50,000 By balance cid - Mat
Material at site
To Indirect Expenses 10,000
To Overheads 18,000
To Notional Profit - balancinq figure 8,55,800
Total 30,92,000 Total
To Profit & Loss ,A/c - transfer (Note b) 4,56,427 By Notional Profit b/d 8,55,800
To Reserve Profit c/d - balancing figure 3t99,373
Total 8,55,800 Total 800
To WIP bid 3o,32,ooo By Reserve Profit bid
To Material at Site b/d 20.000
Note:
(a) percentase or comptetion y?in !'::!t5l = S,*3*g = rsa/o
= Contract Pr ice Rs.40,00,000
'lrlotional
Pr.iii ). !:s|$:S'y"9 = -l x Rs.8,55,800 x = Rs.4,56,427
(b) So, Profit transferred to P&L Nr=
3x
tr Work Certified
80o/o

__!!!P!!!qel---__--i- Ks'
l------.---- }{ssqq - - - ---1
."-- --]-,--_1s' I

Profit and Loss A/c 1 4,56,427 Current Assets: Corrtract Vvori.-;,i-'pt*,..i

(Note: Overall Net Profit of the Company I
rrl^^^^^^^l 1
Work Certified
I I 30,00,000 i

will be determined after debiting Period | | Work Uncertified

Costs, Unallocaied HO Costs, Interest, Tax, I i t4aterials at Site
etc. in the General P&L A/c.) - jb,ZOOO
I i Sub_-t-ctat t--
| | uess, Reserve Profit (or Profit-in-Reserve) I 1:,SS,Sz:) ]

Ii
i'L-
Accrueci
" Accruecj
Woges
Wages
i
']
Iii, ----*
:,000
3,000
Ii
^--. Contractee's
. ^^^ LLessr
i t-essr
- -.---,r:rr-::1^.
Net
lvet Vatue
wut Value
balance :,::'::'fli
Account *-,^^-^
wrP
VyIP
contract VYIP
vatue of Contract
l__(24,00pq8_]
i__G1,!qpqQ
:- Z,5Z,AZI
2,52,6n i

t_ -- +

"

lllustration 4: Prolit Recognition with Notional Profit - Heverse Working N 09

At the end ol first yeai on 31st March, in the books of ABC Constructions Ltd, the Bridge Contract Accounl stands
debited with the cost of Materials lssued, Labour, Overheads expended and Plant issued and its stand* credited with
Matirialat Site Rs.25,000, Material Heturned Rs.15,000 and Plant at Site Rs.4,76,000 after charging deprneiaticn at 15%.
Ttre Material lssued, Labour,_Overheads and Plant issued debited to the Contract Account, are in the ratio of 5 : 4 : : 4, i
75o/ooltheContracthadbeenr*rtifiedbvtheContra*lee'sS.rchit*ctasecmpletedattheenrloftheyearand9*'',1 ,i.lr
certified work value had been received in eash Hs.i6,20,000.'Ihe Accounts Department informs that 2/3'u of the p:."thi uii
cash basis credit to Profit and [.oss aecsunt on the contract is Rs.2,13,600"

From the above information, prepare -

(a) Bridge Contract A/c showing the cost ol work done but uncertified, (b) Work*in*Frogress A/e, & {e) floniradtee's Arlc.

6.22
 Contract Costinq

1. Contract Account for the $ March 2009

Particulars Rs. Pafticulars Rs.
To Materials Issued (WN 1) 7,00,000 By Work in Progress Ay'c
To Direct Labour (WN 1) 5,60,000 Rs'16'20'000 19,00,000
- work certified ( ))
90o/o
To Overheads (WN 1) 2,80,000 - Work Unceftified (balancing figure) 1r40rOO0
Rs'4'76'ooo 5,60,000 By Materials at Site (given) 25,000
To Plant at cost t( ))
850/o
To Notional Profit (Wil 2) 3,56,000 By Materials returned (given) 15,000
By WDV of Plant (given) (after 15% deprn) 4,76,000
(i.e. 1000/o t5o/o = 857o of Cost of Plant)
-
Total 24,56,OOO Tota! 24,s6,OOO
To P & L A/c - transfer (given) 2,L3,600 By Notional Profit b/d 3,56,000
To Reserve Profit c/d - balancinq fiqure L,42,400
Total 4,19,510 Total 4,19,510
To Work-in- Progress b/d (WC+WUC) 19,40,000 By Reserue Profit b/d 1,42,400
To WDV of Plant at site b/d 4,76,000
To Materials at site b/d 25.000

WI{ 1:
Item Material Issued Labour OH Plant at Cost
Ratio 5 4 2 4
Amount (Rs.5,60,000 x 514) = (Rs.5,60,000 x 414) = (Rs.5,60,000 x 214) = Rs.5,60,000 Computed
Rs.7.00.000 Rs.5.60.000 Rs.2.80.000 usino Deorn Rate & WDV

tUN 2: It is given that Profit recognized =?x Notional Profit

" ffiffii# = Rs.2,13,600

So, ' 13, Notional Profit x -Rs.18,00,000

1:':9'999 = Rs.2,13,600. On solving, we have, Notionat Profit = RS.3,sG,OOO.

2. WIP Account
Particularc Rs. Pafticularc Rs.
To Contract Ay'c - Work Certified 1g,oo,ooo
To Contract A,/c - Work Uncertified 1.40.000 By balance c/d 19.40.OO0
Total 19,40,000 Total 19,40.000

3. Contracteet Account
Pafticularc Rs. Particulars Rs.
To balance c/d 16,2o,OOO Bv Bank (oiven) 16,20,000

,Won*holit ReqniEonwi$tno&nal FrotiqHkstcet Absfact-Compting CostotWorktkrcertifred Ngl

WlP Ltd commenced a contract on 'lst Apriland'provides the following information as at 31.tDecember, (being the close of the
linancialyeafl-
1. Materials issued to Contract Rs.2,51,000.
2. Labour Charges Payable Rs.5,65,600.
3. Salaryto Foreman Rs.81,300.
4. A machine costing Rs.2,60,000 has Deen on site for 146 days, its working life is estimated at 7 years, and final scrap value
Rs.15,0fl1.
5. A Supervisor, who is paid Rs.8,000 per month has devoted one half of his time to this contract.
6. All other expenses and administrative charges amount to Rs.l,36,500.
7. Materials in hand at site costs Rs.35,400 on 314 December.
8. The Contract Price is Rs.20lakhs. On 31st December, A3d ol the Contract was completed. However, the Architect has
issued certificates covering 50% of the Contraet Price only and the Contractor had been paid Rs.7,50,000 on account.

20
Students'Handbook on Cost Accountinq and Financial Management

Prepare the Contract Account for the financial year ended 31st December and show the amount of profit or loss to be
recognised on this contract. Also show the summary entries in the Balance Sheet.

Solution:
Note: In this question, cost of work uncertified is not given. However, total work done is 213'd or 66.670/o, while extent of
certification is 50o/o. Hence balance !6.670/o constitutes work done but not certified. This should be computed on
proportionate cost basis in the following manner.

1. Contract Account for the Year ended 31"t December

Pafticulars Rs. Particularc Rs.
To Materials 2,51,000 By Cost of Contract c/d - balancing figure 10r49rOO0
To Labour Charges 5,65,600 By Materials c/d 35,400
To Foreman's Salary 81,300

To Deprn (Rs,2,60,000- Rs.15,000) , +t # 14,000

To Supervision (Rs.8,000 x 9 x 500/o) 36,000

To Other Exoenses & Administration 1.36.500
Total 10,84,400 Total 10,84,400
To Cost of Contract b/d 10,49,000 By Work-in-Progress Account
- Work Certified IWN (a)] 10,00,000
To Notional Profit c/d - balancino fiqure 2.r3.250 - Work unceftified l-WN (b)l 2.62.250
Total L2,62,250 Total L2,62,25O
To P & L Account - Profit transfer tWN (c)l 53,313 By Notional Profit b/d 2,13,250
To Reserve Profit c/d -balancinq fiqure t,59,937
Tota! 2,L3,250 Total 2,t3,25O
To Work-in-Progress b/d (WC + WUC) t2,62,250 By Reserve Profit b/d L,59,937
To Materials b/d 35,400
Note:
(a) Value of WorkCertified = Rs.20 Lakhs x 50o/o = Rs.10 Lakhs.
(b) Cost of 66.670/o work done = Rs.10,49,000 (as per Contract Account above).

So, Proportionate Cost of t6.67o/owork done (i.e. Uncertified Work) = Rs.10,49,000, Rs.2,62,250. .
YOUr,o=
(c) Percentage of Compleuon = *q!9P =5oo/o(given)
Contract Pr ice

so, Profit tlfd to P&L n.= 1x Notional Profit x

ffiffi = 1x Rs.2,13,250 x#ffi = Rs.53,313

2. Balance Sheet as on 31s December

Liabilities Rs. Assets Rs.
Profit and Loss ny'c 53,313 Fixed Assets: (Rs.2,60,000 - Rs.14,000) 2,46,000
(Note: Overall Net Profit of the Company Current Assets: Contract Work-in-Progress
will be determined after debiting Period Work Certified 10,00,000
Costs, Unallocated HO Costs, Interest, Tax, Work Uncertified 2,62,250
etc. in the General P&L A/c.) Materials at Site 35.400
Sub-Total 12,97,650
Current Liabilities: Less: Reserve Profit (or Profit-in-Reserue) (1.59.937)
Wages Accrued 78,120 Net-Total 1L,37,7t3
Direct Expenses Accrued 9,310 Less: Contractee'sAccountbalance (7.50.000)
Net Value of Contract WIP 3,a7,7t3
Total Tota!
Note: The above is only an extract of the Balance Sheet. Hence, Totals are not drawn up.

6.24
 Contract Costing

i,:::l,::,
on 1st
October. On 31st December. when their accounts were made up, the was as follows -
Contract 1 2 3
Contract Price 2,00,000 1,35,000 1,50,000
Expenditure: Materials 39,400 29,000 10,000
Wages 63,250 56,200 7,000
General Expenses 2,000 1,400 500
Plant installed 10,000 8,000 6,000
Materials on hand 2,000 2,000 1,000
Wages accued 1,725 1,900 800
General Expenses accrued 300 200 100
Work Certified 1,20,000 80,000 19,000
Cash Received in respect thereof 90,000 60,000 13,500
Work linished but uncertified 3,000 4.000 1,050

Contract t had been negotiated two years back with an escalation clause providing that should Material Prices and Wage Rates
increase by more than 2.5olo, the Contragleg would increase the Contract Price by 207o ol the rise in the cost of materials and
40% of the rise in the wage rates beyond 2.5o/oin each case.

It is agreed that since the signing of the agreement the Material Prices had gone up by 107o and Wage Rates by 15%, the value
of Work Certified does not take into account the etfect of the escalation clause.

The Plant was installed on the dates of the contracts and depreciation is taken at 10o/o per annum. Prepare the respective
accounts in the Contract Ledger and give suitable entries in the Company's Balance Sheet.

Solution:
1. Computation of Escalation Claim
Note: Escalation Clause is applicable only for Contract No.1. The escalation claim is computed as under -
(a) Materials
No claim Escalation Claim = 2oolo of this differcnce

Level of Normal Cost Permissible Cost ActualCost

Cost = 100o/o = Normal +2.5o/o= 102.5o/o Given
= 110o/o
+ + + +
Materials Consumed =
100 Escalation Claim = 20olo Purchases less Closing Stock
Materials ' x
Rs.37.+oo
110 Rs.34,000 + 2.5o/o = of (37,400 - 34,850) = Rs.39,400 * Rs,2,000
= Rs.34rOO0 Rs.34,850 = Rs.51O = Rs.37r400
(b) Labour
No claim Escalation Claim = 40olo of this differcnce

Level of Normal Cost Permissible Cost Actual Cost

Cost = 100o/o = Normal +2.5o/o= 102.5o/o Given = 115o/o

100 Escalation Claim = 40olo Wages incurred= Paid + P'ble

'
ns.o+.gzs x
115 Rs.56,500 + 2.5o/o = of (64,975 - 57,972.50) = Rs.63,250 + Rs.1,725
Labour = Rs.56,5OO Rs.57,912.50 = Rs.2r825 = Rs.54r975
Journal Entry for recording the escalation claim of Rs.510 + Rs.2,825 = Rs.3r335.
Contracteet Account Dr. 3,335
To Contract Account 3,335

6.25
Students'Handbook on Cost Accounting and Financial Management

2. of on Plant used
Contract Number 1 2 3
(a) Value of Plant (Rs.) Rs.10,000 Rs.8,000 Rs.6,000
(b) Period of use ls Jan to 31* Dec = 12 mths ls July to 31* Dec. = 6 mths ls oct to 31st Dec. = 3 mths
(c) Depreciation at 100/o p.a Rs.1,000 Rs.40O Rs.15O

3. Contract Account for the r 3lst December

Particulars 1 2 3 Total Pafticulars 1 2 3 Total
To Materials 39400 29000 10000 78400 By WIP alc
To Wages -Work Certified 120000 80000 18000 218000
- Paid 63250 s6200 7000 126450 -Work Uncertified 3000 400: 105: 80s0
- Payable 1725 i800 800 4325 By Contracteeb 333s 3335
To Gen Exps -
b/c Escalation
- Paid 2000 1400 s00 3900 By balance c/d
- Payable 300 200 100 600 Materials 2000 2000 1000 5000
To Depreciation 1000 *: 150 1550 By Loss c/d 3000 3000
To Notional Pft 20660 1500 22t60
Total 128335 89000 20050 237385 Total r28335 89000 200s0 237385
To Loss b/d 300: 3000 By Notional Pft b/d 20660 150: 22L60
To P&L - tfr 10330 10330 ByP&L-tfr 3000 3000
To Reserve ffi 10330 Nil 1,500 11830
Total 20560 3000 1,500 25160 Total 20660 3000 1500 25160
To WIP b/d 123000 84000 19050 22,050 By Reserue 10330 Nil 1500 11830
To Matls b/d 2000 2000 1000 5000 Profit b/d

4. Profit
Contract Number I 2 3
(a) Notional Profit las oer Contract fucl 20.660 (3,000) 1,500
(b) o/o Work Certified
of completion = 600/o 59o/o LZo/o
Contract Pr ice
(3,000) Loss fully Less than 25olo
(c) Profit Recognised Z x 20,660 x 75o/o= 10,330
written off complete, so ignored.

5. WIP to be Balance Sheet

Contract Number 1 2 3
Work Certified 1,20,000 80,000 18,000
Work Unceftified 3,000 4,000 1,050
Materials at Site 2,000 2,000 1,000
Less: Reserve Profit (10,330) Nil (1,500)
Less: Contractee's A/c (90,000 - Esc. Claim 3,335) (86.665) (60.000) (13.s00)
Net Value of WIP 28,005 26,000 5,050
Note: Cash received on account should not be merely subtracted to arrive at the net WIP value. Where Escalation Claim
is recorded by a Journal Entry, the net balance in the Contractee's lilc should be considered

,," 3. P: fit Recognttion using:,wt.&

llluetration,ft,Norioital Prolitand Estinnted'llFtrl kpfifs 1.p-roliln@gniton ii[Iffi.
A Contract exoected to be completed
comoleted in Year 4, erhibiis the
4. exhibits followino infor-,
ihe followinq information - tn
End of Year Value ol Work Certified Cost of work to date Cost ol work not vet certified Cash rcceived
1 0 50,000 50,000 0
2 3,00,000 2,30,000 10,000 2,75,000
3 8.00.000 6,60,000 20.000 7.50.000
TheContractPriceisRs'10,00,000andtheestimatedprofitis207".Youarerequireot
been credited to the Profit and Loss A/c by the end of years 1, 2 and 3.

6.26
 Contract Costing

Solution:
Particularc Year 1 Year 2 Year 3
1. Income: (a) Work Certified Nil 3,00,000 8,00,000
(b) Work Uncertified s0,000 10,000 20.000
Total Income 50,000 3,10,000 8,20,000
2. Cost of work till date s0.000 2,30,000 6,60,000
3. Notional Profit (1 - 2) Nit 80,000 1,60,000
o/o
Work Ceftified Nil Rs.3,00,000 Rs.8,00,000 g0o/o
4. of Completion = = 30o/o =
Contract Pr ice Rs.10,00,000 Rs.10,00,000
5. Transfer to P&L A/c Nil ! xNotional *r cash Received l xNotional Pftx
Cash Re ceived
{based on Notional Profit formula) 3 Work Certified 3 Work Certified
(Note: Since question specifies
Estimated Total Profit 20o/o, i.e. = = !x ns.8o.ooo * Rs.3,00,000
Rs'2'75'ooo Rs'7'50'ooo
=33x 1.6o.o00x Rs.8,00,000
Rs.2,00,000, ETP can also be used for
3
Profit Recoqnition.) = Rs.2LM4 = Rs.1r00r0OO

Profit on ETP will be as under Rs.

Formula Year 2 Year 3
(a) ETp * Work Ceftified * J'0q J'Oq
= 2.00 = Rs.60rooo = 2.00 = Rs.1r60r0oo
Contract Pr ice 10.00 " 10.00
,ht Ftu v _
Work Certified Cash Re ceived
v _
= 2.oo x 3'oo x2'75 = 2.oo x 8'00 x 7'50
Contract Pr ice Work Certified 10.00 3.00 10.00 8.00
= Rs.SS,OOO = Rs.1,5O,OO0
Cost till date 2'30
(c) ETP x
Estimated Total Costs
= 2.oo x
8.00
= Rs.57r500 = 2.00 x 99
8.00
= Rs.1,65,500

(d) ErP x
Cost till date x- Cash Re ceived = 2.00 x
2'30 x2'75
= 2.oo x
6'60 \ 2'75
Estimated Total Costs Work Certified 8.00 3.00 8.00 3.00
= Rs.52,708 = Rs.1,51,25O
Since the above amounts are higher than the profits computed based on Notional Profiits, on prudence / conservatism basis,
the amounts shown at Point 5 above shall be transferred to P&L A/c.

.iiiiis$aiqn 8 il,ofionat Piofftand.Estim#Sf,ot .*rom +Stolft neAOSnftlon $s7

a conselvative estimate of profit on contract (which has been 90% complete) from the
Particulars Rs.
Total Expenditure to date 22,50,000
Estimated further expenditure to complete the contract (including Contingencies) 2,50,000
Contract Price 32,50,000
WorkGrtified 27,50,000
Work Uncertified 1,75,000
Cash Received 21,25,000

Solution:
WorkCeftified Rs.27,50,000
1. Percentage of Completion -Contract Pr ice Rs.32,50,000 = 84.620/o

2. Current Year Profit

= Income till date (i.e. WC + WUC) less Expenditure till date
= (Rs.27,50,000 + Rs.1,75,000) - Rs.22,50,000 = Rs.6r75r0o0
= Contract Price less Estimated Total Costs
3. Estimated Total Profit (ETP)
= Rs.32,50,000 - (Rs.22,50,000 + Rs.2,50,000) = Rs.7,50,000
4. Profit to be transferred to P&L = Least of the following (a) to (0 = Rs.3r471727

(a) Estimated rotat Profit . yTo !T'110

Contract Pr ice
= Rs.7.50.000 r Rs'27'50'000
Rs.32,50,000
= Rs.6,34.G15

(b)Estimated rotar prontx##P "ffi*r,,ee#=Rs.7,50,000"1*#H33 "ff#ffi= Rs.4,e0,385

5.27
Students'Handbook on Cost Accounting and Financial Management

Cost till date

(c) Estimated Total Profit x
Estimated Total Costs
= Rs.7,50,009 , E'22,I9499 = Rs.6r75rooo
Rs.25,00,000
Cost till date Cash Re ceived
(d) Btimated Total Profitx
=- .-:-1":=-
Estimated Total Costs Work Ceftified
=7,50,@0x 5 13,:9,999, l''11,3:,999 = Rs.5,2r,5e1
Rs.25,00,000 Rs.27,50,000
(e) Notional profit work
x certified E!289,09q
Contract Pr ice
= Rs.6,75,00g * = Rs.5r71r154
Rs.32,50,000
(fl 3 profit cash Received
" 3 x Notional x =?x Rs.6,75,000 x lt'11'3:'999 = Rs.3,47,727
Work Certified 3 Rs.27,50,000

Paramount Engineers are engaged in construction and erection of a bridge under a long-term contract. The cost incurred upto
31st Mareh was as under:
Fabrication Costs: Direct Materials Rs.280 Lakhs
Direct Labour Rs. 100 Lakhs
Overheads Rs. 60 Lakhs
Total Fabrication Costs Rs. 440 Lakhs
Add: Erection Costs Rs. 110 Lakhs
Total Costs to date Rs.550 Lakhs

The Contract Price is Rs.11 Crores and the cash received on account tillSlst March was Rs.6 Crores. Work Certified till g13r
March was however Rs.6.80 Crores.

A technical estimate of the contract indicate the following degree of completion of work -
Fabrication: Direct Material-70o/o, Direct Labour and Overheads - 600/o. Erection - 40%.

Estimate the profit that could be taken to Profit & Loss A/c against this partly completed contract as at 31sr March.

Solution: 1. Statement of current & Total Rs.

Pafticulars Till Date Total
A. Income (Work Ceftifled) 680.00 (Contract Price) = 1,100.00
280'oo
B.Expenditurc Fabrication: Materials 280.00 = 4oo.oo
70o/o

1oo'oo
Labour 100.00
600/o
= 166.67
60'00
Overheads 60.00
600/o
- 1oo.oo

110'oo
Erection 110.00
40o/o
= 27s.oo

SuFTotal 5s0.00 94L.67

C. Profit (A - B) Notional Profit = 130.00 Estimated Total Profit = 158.33
2. of Profit to be transferred to P&L A/c
A. Percentage of Completion Work Certified 680.00
Contract Pr ice
=-1,100.00 = 61.820/o
B. Profit to be transferred to P&L = Least of the followinq (a) to (O Rs.76.47 Lakhs

(a) Estimated Total Profit x Work Certified

Contract P'r ice
= 158.33,.
fffi# = e7.88

(b) Estimated Total Profit x Work Ceftified Cash Re ceived

= 158.33 x 680'00 x 600'00
= 8G.37
Contract Price Work Certified 1,100.00 680.00
Cost till date
(c) Estimated Total Profit x
Estimated Total Costs
= 158.33
' ## = e2.48
Cost till date Cash Re ceived 550'oo
(d) Estimated Total Profit x x x 5oo'oo
-x
Estimated Total Costs Work Certified
= 158.33
94t.67 680.00 = 81.Go
6.28
 Contract Costinq

work certified 680'00

(e) Notional Profit x = 130.00 x = 80.36
Contract Pr ice 1,100.00

ol x Notional Profit x
Cash Re ceived
Work Certified
2
3
x 13o.oo x 600'00 = 7G.47
680,00
Obseruation: Least of the above is Rs.76.47 Lakhs (6m formula listed above). Hence, Profit recognised on prudence
basis is Ps.76.47 Lakhs. The balance Reserve Profit is (Rs.130.00 - Ps.76.47) = Rs.53.53 Lakhs.

llhp&ation 10: Estirufu of Tohl Profitand Profit Recognition N gs

Supreme Constructions are engaged in Duilding contracts. One of their contracts commenced 15 months ago remains
unfinished. The followinq inlormation relatinq to the contract has been oreoared for the vear iust ended -
Particulars Rs.000s
Contract Price 2,500
Value of Work Certified at the end of the year 2,200
Cost of work not yet certified at the end of year 40
Opening Balances: Cost of work completed 300
Materials on Site (Physical Stock) 10
During the year: . Materials delivered to site 610
Wages 580
Hire of Plant 110
Other Expenses 90
Closing Balance: Materials on Site (Physical Stock) 20

As soon as materials are delivered to the site, they are charged to the Contract Account. A record is also kept ol materials as
they are actually used on the contract. Periodically a stock check is made and any discrepancy between Book Stock and
Physical Stock is transferred to a g.eneral "Contract Material Discrepancy" Account. This is absorbed back to each Contract,
cunently at the rate of 0.5% of Materials booked. The stock check at the year+nd revealed a Stock Shortage of Rs.5,000.

In addition to Direct Charges listed above, general 0H are charged to contracts at 5olo of value of Work Certified. General 0H of
Hs.l5,000 had been absorbed into the cost of work completed at the beginning of the year. lt has been estimated that further
costs to complete the contract will be Rs.2,20,0fi1. This estimate included the cost ol materials on site at the end of the year
lust finished and also a provision for rectification.
Required:
1. Determine the profitability of the above contract and recommend how much profit (to the nearest Rs.000s) should be taken
lor the year just ended.
2. State how your recommendation in (1) would be atfected if the Contract Price was Rs.40 Lakhs (rather than Rs:25 Lakhs)
and if no estimate has been made of costs to completion. Assume Retention Money = 2trlo.

Solution: 1. Contract Account

Pafticularc Rs.OO0s Particularc Rs.0OOs
To Work-in-Progress b/d 3,00 By Work-in-Progress Ay'c
To Materials b/d 10 - Work Certified 22,00
To Materials Issued 6,10 - Work Uncertified 40
To Wages 5,80 By Contract Material Discrepanry A/c - 5
To Plant Hire Charges 1,10 - Shortage Transfer
To Other Expenses 90 By balance c/d - Materials 20
To Contract Material Discrepancy Ay'c - 3
absorbed at 0.5olo of (10 + 610 - 20).
To General OH (5olo of 2,200'lessJB)lao 95
To Notional Profit c/d * balancinq fioure 4.67
Total 22,65 Tota! 22,65
To P&L Ay'c - Profit transfer (See Note 2) 4,1! By Notional Profit b/d 4,67
To Reserve c/d - balancinq fioure 56
Tota! 4,67 Total 4,67
To Work-in-Progress b/d 22,40 By Reserue Profit b/d 56
To Materials b/d 20

6.29
 2. of Profit on basis Rs.OOOs
Work Ceftified _22,00
A. Percentage of Completion
Contract Pr ice 25,00 = 88o/o
B. Current Year Profit = as per Contract A,/c above 4.67
C. Cost till date = as per Conkact Iy'c above
= WC + WUC - Notional Profit = 22,00 + 40 - 4,61 17.73
Contract Price 25,00
D. Estimated Total Profit (ETp) Less: Estimated Total Costs (a) Cost till date (17,73)
(b) Fufther Costs qiven (2.00) 5,07
E. Profit to be transferred to p&L Least
= of the followinS (a) to (c) 4,tl
(a) Estimated Total Profit x Work Certified
Contract
Cost"r'tce
till date
= 5,07
"ffi = 4,46

(b) Estimated Total profit x

Estimated Total costs = 5,07 = 4,51
"W
(c) Notional Profit work certified
x
Contract pr ice = 4,67 = "# 4,tl
Note: Only these formulae are used, since percentage of payment is not given for part (1) of the question.

3. Answer to part (2) of the euestion

o If contract price were Rs.40 Lakhs, percentage of completion JVork certified
- ??,0.9 = silo/o.
= 40,00
Contract pr ice
o Here,. Profit Recognition will be based on Notional Profit only. (since it is given
that no estimate of the costs of
completion has been made).
o Profit to be recognir"d = x Notional profit x
Cash Re ceived 2
x 4,67 x 80% = 449.
i Work Certified 3

ffi$tratfi0llllr.# of T@Pr.ofit@d Prost ,;i i;li:ir.orti,lli.j#i,1.,:,i.:,;';,f.,1+i.;i,i i;,i,-,.., irl,,;i:lr;..ti;1i #f

i
MNP Construction Ltd commenced a contract on 1't April oi tlnanciCtjear tor Rs.17.50
Lakihs. !t was tlecided to estimate the
total profit and to take to the credit oJ Profit and Loss Account,.the proportion of estimated protit
on cash basis, which work
bore to the total contract. Actual expenditure in Year 1 and esiimated expenditure in year 2 are
-
Particulars Year 1 Actuals Rs. Year 2 Estimates Rs.
Material issued 3,00,000 . 5,50,000
Labour: Paid 2,00,000 2,50,000
outstanding at end 20,000 30,000
Plant purchased 1,50,000
Expenses: Paid 75,000 1,50,000
Prepaid at end 15,000
Plant returned to Store (Historical Cost)
- 50,000 (on 31,r Dec.) f ,00,00;
Materialat Site 20,000 50,000
Work Certified 8,00,000 Fuil
Work Uncertified 25,000
Cash received 6.00.000 Full
ThePlantissubjecttoannualdepreciational25o/oofCost.
the contract A/c. Determine the profit on the contract for year 1 on prudent basi-s.

Solution: 1. of Cunent & T, Profits

Pafticularc Till date Additional Total
A. Income:
Work Certified Given = 8,00,000 Given = 17,50,000
Work Unceftified Given = 25,000
Total 8,25,000 17,50,OOO
B. Expenditure:
Materials (WN a) 2,90,000 5,7.p,000 8,50,000
Labour (Wt{ b) 2,20,000 2i80,000 5,00,000
Expenses (WN c) 60,000 1,65,000 2,25,000
Depreciation (WN d) 37.500 18,750 56.250
Total 5,97,500 10,33,750 16,31,250

6.30
a

Pailicularc Till date Additional Total

C. Profit (A - B) 2,27,5OO Lr1,g1750
Notional Profit Estimated Total Profit
, D. Profit transfer b P&t A/c (based on formula specified in the question)
profit, Rs.8,00,000
Estimated rotat
##P " ffiffi= Rs.1,18,750 x
Rs.17,50,000 " Hffi*ry= Rs'4or714
Note:
Particularc Year I Year 2
(a) Materials Opening Stock + Issues - Closing Stock = Opening Stock+ Issues - Closing Stock =
Consumed Nil + Rs.3,00,000 - Rs.20,000 = Rs.2,90,000 Rs.20,000 + Rs.5,50,000 - Nil = Rs.5.70.000
(b) Labour Cost Paid + Outstanding at end = Paid + Outstanding at end =
incurred Rs.2,00,000 + Rs.20,000 = Rs.2,20.000 Rs.2,50,000 + Rs.30,000 = Rs.2,80.000
Paid during the year Less Prepaid at the end = Prepaid at beginning + Paid during the year =
(c) Expenses
Rs.75,000 - Rs.15,000 = Rs.60.000 Rs.15,000 + Rs.1,50,000 = Rs.1.G5.000
Plant used Rs.1.50.000 Plant used 1,50,00C- 50,000= 1,00,000
Period of Usaqe 1 Apr to 31 Mar = 12 months Period of Usaqe 1 Apr to 31 Dec= 9 months
(d) Depreciation Deoreciation Rate 25o/o o.a. Depreciation Rate 25o/o D.a.
Depreciation Amt Rs.1,50,000 x 25o/ofor L2 Depreciation Amt for 9 Rs.1,00,000 x 25o/o
months = Rs.37,5OO months = Rs.1&750
r Labour: For Year 2, the paid Labour Cost is assumed as exctusive of the Accrued Expense of the previous year.
Alternative treatment of Labour Cost shall be = Paid during the year + O/S at end O/s at Ueginning irr.Z,SO,OilO *
- =
30,000 - Rs.20,000 = Rs.2,50,000.
. Depreciation:
(a) Year 1: Asset is assumed as returned only at the last date of the year. So, Depreciation is charged on the full value of
asset used.
(b) Year 2: Asset costing Rs.SO,OOO is already returned on the last date of previous year. Hence, Depreciation is
charged only on the cost of balance asset used during year 2.

2. Conuact Account Financial Year 1 31s March

Particularc Rs. Particularc Rs.
To Materials Consumed 2,80,000 By Work-in-Progress Ay'c
To Wages 2,20,0N - Work Certified 8,00,000
To Expenses 60,000 - Work Uncertified 25,000
To Depreciation 37,500
To Notional Profit dd 2,27,5OO
Total 8,25,000 Total 8,2+OO0
To P & L A/c - Profit transfer (See WN 1) 40,7t4 By Notional Profit b/d 2,27,500
To Reserve Profit c/d
(balancinq fiqure) 1,86.786
Total 2,27,500 Total 2,27,5OO
To Work-in-Proqress b/d (WC + WUC) 8,25,000 By Reserve Profit b/d 1,86,786

W{lti..**
RST Construction Ltd commenced a contract on lst April 2$g. the
.:.'.,, ":.:-.,,"; :...:,frli:i$l#
torai-Cd;iraci",wa-Ji6;iiiig"2iJi5.""iifi;"iitdiJ& to
estlmate the Total Profit on the contract and to take to the credit of P & L Account that proportion of estimateO profft
on castr
basis, which the work completed bore to the total contract. Actuat expenditurc for ure peri&i rJapiu
aioiilo ifi-r,ii,iir ioro
and estimated expenditule for la April 2010 to 3$ september 2010 are qiven below
Particulars lst Apr 2009 to 31* Mar 2010 1* Apr 2010to illh Sep 2010
(Actuals) ( (Estimated) (Hs.)
ilateriaF lssued 7,76,250 12,99,375
l-abour: Paid 5,17,500 6,19,750
Prepaid 37,500

Plant purchased
Outstanding 12,500 5,d
4,00,000
Plant Returns to Store (Historica! Cost) (0n 30u Sept 2(X)9) 1.00.000 (On 30tr Sept 201013.00.000

6.31
Students'Handbook on Cost Accounting and Financlal Management

Particulars lsr Aor 2009 to 31sr Mar 2010 1st Aor 2010 to 3@ Sep 2010
Expenses: Paid 2,25,000 3,75,000
Outstanding 25,000 10,000
Prepaid 15,000
ItUork Certified 22,50,000 trl
Work Uncertified 25,000
Cash received 19,75,000
Material at site 82.500 42.500

@depreciational25%onWDVMethod.TheContractislikelytobecompletedon30tttSep2010.
Required: Prepare the Contract Account. Determine the profit on the contract for the year 200$'2010 on prudent basis, which
has to be credited to P & L Account.

Solution: 1. Statement of Tr
Pafticularc Till date Additional Total
A, Income:
Work Certified Given = 22,50,000 Given = 49,21,875
Work Uncertified Given = 25,000
Total 22,75,OOO 49,21,875
B. Expenditure:
Materials (WN a) 6,93,750 13,39,375 20,33,L25
Labour ,(WN b) 4,92,500 6,49,500 tL,42,000
Expenses (WN c) 2,35,000 3,75,000 5,10,000
Deoreciation (WN d) 87.500 28.125 1.15.625
Total 15,08,750 23,92,OOO 34,OO,75O
C. Profit (A - B) 7,66,250 10,21rtAs
Notional Profit Estimated Total Proft
D. Profit transfer to P&L A/c (based on formula specified in the question)
work certified . Work Et:Y"g E'2?80'009 , B!92!499 Rs.3,8e,o(x!
Estimatedrotatprofitx
Contract Price i?tl =Rs.10,21,12s
Certified " Rs.49,21,875 Rs.22,50,000 =
1$ Aor 2OO9 to 31s Mar 2010
Opening Stock+Issues - Closing Stock = Opening Stock + Issues - Closing Stock =
Nil + 7,76,250 - 82,500 = 6,93,750 500 + 12,99,375 -
Paid + O/S at end - Prepaid at i:nd = Prepaid of previous period + paid during the.year'+
5,17,500 + 12,500 - 37,500 = 4,92,500 O/S at end - O/s at beginning =

Paid + O/S at end - PrePaid at end = Prepaid of previous period + paid during the year +
2,25,000 + 25,000 - 15,000 = 2,35,000 O/S at end - O/s at beginning =
000+10,000-25,000=3
3,00,000 x25o/ol,l2 rnontl^rs = 75,000 (3,00,000 - 75,000) x 25o/o x 5 months = 28,125
1,00,000 x25o/ox 6 months = 12,500

2. Contract 31s March 2010

Pafticulals Rs. Pafticula:s Rs.
To Materiallssued 7,76,250 By Work in Progress
To Labour (as per WN above) 4,92,500 - Work Certified 22,50,000
To Expenses (as per WN above) 2,35,000 - Work Unceftified 25,000
To Depreciation on Plant 87,500 By Materials at Site 82,500
To Notional Prcfit 7,66,250
Total 23.57.500' Total 23,57,500
To P&L Ay'c - Profit transfer as per WN 1 above 3,89,000 By Notional Profit b/d 7,66,250
To Reserue Profit c/d 3,77,250
Total 7,66,250 Total 7.66.2sO
To WIP b/d 22,75,000 By Reserue Profit b/d 3,77,250
To Materials at site b/d 82,500

6.32
 :;:ff, I.,i
AKP Builders Ltd commenced a contract on 1.r April zoog. ffre Total contrqgl_rryas tor Rs,5sg,000. Actual rrf.noitrr. til; f*
stApril 2008 to 31st March 2009 and estimated erpenditure for lst
April 2009 to 31st December 200g are qiven below-
Particulars 2008-2009 (Actual) 2009-2010 (9 months) Gstimated)
Material issued Rs.90,000 Rs.8!i,750
Labour: Paid Rs.75,000 Rs.87,325
Outstanding at the end Rs.6,250 Rs.8,300
Plant Rs.25,000
Sundry Expenses:Paid Rs.7,250 Rs.6,875
Prepaid at the end Rs.625
Establishment Charqes Rs.14.625
A part of the material was unsuitable and was sold for Rs.18,125 (Cost being Rs.15,000) and a part of PIant was soapped and
disposed of for Rs.2,875. The value ol Plant at Site on 31"t March 2009 was Rs.7,750 and value of Material at Site was Hs.4,250.
Cash received on account to date was Rs.l,75,000, representing 80o/o of the Work Certified. The cost of Work Uncertified was
valued at Hs.27,375.
The Contractor estimated further expenditure that would be incurred in completion of the conlract as under
-
o The Contract would be completed by 31st December 200g.
o A further sum of Rs'31,250 would have to be spent on the Plant and the Residual Value of the Plant on the completion of
the contract would be Rs.3,750.
. Establishment Charges would cost the same amount per month as in the previous year.
. Rs.10,800 would be sutficient to provide for contingencies.

Prepare Contract Account and calculate Estimated Total Profit on this contract. Prolit transferable to Profit and Loss Account
is to be calculated by reducing Estimated Profit in proportion of Work Certified and Contract price.

Solution: 1. of Current & Total

Pafticularc Tilldate Additiona! Total
A. Income:
Work Certified
E#rrq = 2,t8,750 Given = 5,00,000
Work Unceftified Given = 27,375
Total 2,46,L2s 5,00,000
B. Expenditure:
Materials (WN a) 70,750 90,000 1,60,750
Labour (WN b) 81,250 89,375 1,70,625
Expenses (WN c) 6,625 7,500 14,L25
Depreciation (WN d) 14,375 35,250 49,625
Establishment t4,625 14,625x91t2 = 10,969 25,594
Continqencies (Given) 10,800 10.800
Total r,87,625 2,43,894 4,3t,5t9
C. Profit (A - B) 58,500 68,48r
Notional Profit Estimated Total Profit
D. Profit transfer to P&L A/c (based on formula specified in the question)

Estimated rotat profitx

#ffi" = Rs.68,481 , ##ffi# = Rs.2e,e60
Notes: "gEP
Pafticularc Upto 31d March 2009 1$ Apri! 2009 to 31'st Dec. 2OO9
(a) Materials Opening Stock + Issues - Closing StoCk - Sales Opening Stock + IssueS
'Consumed - Closing Stock
-
= Nil + 90,000 - 4,250 15.000 ;70.750 , = 4,250+ 85,750-Nil= 90,000
(b) Labour Cost Paid + O/S at end Paid during the year + O/S at end - O/S at beginning
incurred = 75,000 + 6,250 = 81,250 = 87,325 + 8,300 - 6,250 = 89,375
(c) Expenses Paid - Prepaid at end Prepaid of prev. period_+T#

(d) Depreciation
= 7,250 - 625 = 6,625 ill?,5:";[
Cost - Disposed - Residual Value Opening Value + Purchases - Residual Value
= 25,000 - 2,875 - 7,750 = 14,375 = 7,750 + 31,250 - 3,750 = 35,250

6.33
Students'Handbook on Cost Accounting and Financial Management

2, for the
Particularc Rs. Pafticularc Rs.
To Material Issued 90,000 By Work in Progress
To Labour (as per WN above) 81,250 -Work Certified 2,L8,750
To Expenses (as per WN above) 6,625 -Work Unceftified 27,375
To Plant at Cost 25,000 By Bank - Sale Value of Plant sold 2,875
To Establishment Charges L4,625 By Bank - Sale Value of Materials sold 18,125
To P&L Iy'c - Pft on Sale of Matls. 3,125 -
By balance c/d Materials at Site 4,250
To Notional Profit 58.500 By balance c/d - Plant at Site 7,750
Total 2,79,L25 Total 2,79,L25
To Profit & Loss A/c - Transfer 29,960 By Notional Profit b/d 58,500
To Reserue Profit dd 28.540
Total 58,50O Total 58,500
To WIP bld (2,18,750 + 27,375) 2,46,125
By Reserue Profit b/d 28,540
To Materials at sitb b/d 4,250
To Plant at Site b/d 7.750
Note: Plant scrapped & disposed off for Rs.2,875 is assumed to be at cost. So, Loss / Gain thereon is ignored.

oe{€bil Fofr - M
ftcognfrion - Disp@ d ilateriab afr a Loes
Dick and Harry, undertook a contract for construction of a cycle shed for a sum of Rs.l,fl),fi[ . The work was started
on 1* April, 20X1 and the following expenses were incurred:
Plant - Rs.S,fi)O, Stores - Rs.l8,fiXt, Wages - Rs.16,250, Sundry Expenses - Rs.l ,325, Establishment Charges: Rs.2,925

Materials costing Rs.3,0(X) were found to be unsuitable for the contract and werc immediately sold for Rs.2,625.

The vatue ol Plant on 31tt March 20)P, was Rs.1,550 and of Stores Rs.850. Cash received on account was Rs.35,{X}0
reprcsenting 807o of the work certified. The work uncertified was valued at Rs.5,475 and this was certified later for Rs.6,250.

The Fhm decided to estimate the further expenditure on completion of the contract and tO take to the credit of P&L A/c for
20X1-X2, that portion of the total estimated profit, which the work certified, bore to the total contract price.

The following estimates were made:

o The contract would take a further 9 months to complete.
r Wages likely to be incuned were Rs.17,875.
. Cost of Stores required in addition to those in stock on 31$ March 20X2 would be Rs.17,150 and the further Sundry
Expenses of Rs.1,500 would be incurred.
o Additional Plant required would be Rs.6,250 and the Plant would have a Residual Value of Rs.750 on the completion of
the contract.
. Eshblishment Charges would cost the same per month as in the previous year.
o 2.S%ool the Total Cost of the contract should be kept as Reserve for Contingencies.

Preparc Contract, Stores and Plant Account for the year ended 31st March 20X2 and also show your calculations for the amount
credited to Profit & Loss Account lor the year.

1. Statement of Currcnt & Total Profits

Particularc Till date Additional Total
A. Income:

Work Ceftified !:Hil+ =43'750

1,00,000

Work Uncertified 5,475

Tota! 49,225 1,00,000
B. Expenditure:
Materials / Stores 14,150 18,000 32,150
Wages 16,250 L7,875 34,L25
Sundry Expenses L,325 1,500 2,825
Establishment Charges 2,925 2,194 5,119
Deoreciation 3.450 7.050 10,500

6.34
 Pafticularc Till date Additional Total
Sub--Total Cost excluding Contingencies 38,100 46,6t9 84,719
Add: Contingencies (2.5o/o of Rs.84,719) 2,118 2,t18
Total 38,100 48,737 86,8,37
C. Profit (A - B) tL,125 13,163
NotionalProfit Estimated Total Profit
D. Profit transfer to P&L A/c (based on formula specifled in tne question)

rotatprofitx ,.
Estimated
##F =Rs.13,163
ffi = Rs.5,75e
Notes:
Particulars Incurred till date Additional
(a) Materials Issued - Sold - Closing Stock Opening Stock + Purchases
= 18,000 - 3,000 - 850 = 14.150 = 850 + 17,150 = 18.000
(b) Establishment Charoes Rs,2,925 (qiven) for 12 months Rs.2,925 x 9112 = Rs.2,194 for 9 months
(c) Depreciation Cost Less Residual Value Opg Balance + Purchases - Residual Value
-
= 5,000 1,550 = Rs.3,450 = 1,550 + 6,250 - 750 = Rs.7,050
2. Contract Account for ended 31 20x2
Particulars Rs. Particularc Rs.
To Materials Issued 19,000 By Work-in-Progress - Work Ceftified 43,750
To Wages 76,250 - Work Uncertified 5,475
To Sundry Expenses 1,325 By balances c/d - Plant 1,550
To Establishment Charges 2,925 - Materials 8s0
To Plant 5,000 By Bank - Sale Value of Material Sold 2,625
To Notional Pr6nt c/O 11,125 By P & L (Loss on Materials) (3.000 - 2.625\ 375
Total 51,625 Total 5L,625
To P&L Ay'c - Profit transfer as per WN 1 above 5,759 By Notional Profit c/d 11,125
To Reserve Profit c/d - balancino fiqure 5.366
Total tL,L25 Total 11,125
To WIP b/d (WC + WUC) (43,750 + 5,475) 49,225 By Reserve Profit b/d 5,356
To Plant at Site b/d 1,550
To Materials at site b/d 8s0
Note:LossonSaleofMaterialwillbedebitedseparatelytoP&
Rs.6,250 will be considered in the subsequent period,s accounts.

l::.il*
st March
J uncoiipleteo ;;;ii.Li;'iJ'ffi
31rt
Particulars / Contract No. 723 726 729 731
TotalContract Price B.2A 14.4(l 10.08 28.80
Estimated TotalCosts on the Contract 20.50 11.52 12.60 21.60
Expenses for the year ended 31st March
Direct Materials 5.22 1.80 1.98 0.80
Direct Wages 2.32 4.32 3.90 2.16
Overheads (excluding Depreciation) 1.06 2.60 2.62 1.05
Profit Reserve as on lst April(beginning) 1.50
Plant issued at Cost during the year s.00 3.50 2.75 3.00
Materials at Site as at 1s April (beginning) 0.75
Materials at Site as at 31st March (end) 0.45 0.; 0.; 0.;
Value of Work Certified on 1st April (beginning) 4.75
Work Certified during the year 12.76 13.26 7.56 4.32
Work Uncertified as on 31st March (end) 0.84 0.24 0.14 0.18
Progress Payments received durinq the vear 9.57 9.00 5.75 3.60
Depreciation atzcflh per ann
remaining contracts were started in the la week of April this year. Determine the Profit / Loss in respect
ol each contraA for
the year ended 31st March. Also prepare the Contract Account.

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Students'Handbook on Cost Accounting and Financial Management

Solution: 1. Contract Account for the vear ended 31o March (in Rs.Lakhs
Pafticularc 723 726 729 731 Total Particulars 723 726 729 73L Total
To WIP b/d 4.75 4.75 By Reserue b/d 1.50 1.50
To Materials b/d 0.75 0.75 By WIP a/c
To Materials 5.22 1.8; 1.9; 0.8; 9.80 -Work Certified 17.5r 13.26 7.56 4.32 42.65
To Wages 2.32 4.32 3.90 2.L6 12.70 -Wort Uncertified 0.84 0.24 0.14 0.18 1.40
To OH 1.06 2.60 2.62 1.05 7.33 By balance c/d
To Depreciation 1.00 0.70 0.55 0.60 2.85 *Materials 0.45 0.20 0.08 0.0s 0.78
on Plant at'20o/o
To Notional Pft {d 5.20 4.28 9.48 Bv Loss c/d t.27 0.06 1.33
Total 20.30 L3.70 9.05 4.61 47.66 Total 20.30 L3.70 9.05 4.61 47.66
To Loss b/d t.27_ 0.06 1.33 By Notional 5.20 4.28 9.48
To P&L - Pft tfr 1.3; 1.5; 2.86. Profit b/d
To Reserve Pft dd 3.90 2.72 6.62 By P&L - Loss tfr 2.52 0.05 2.58
To Provision c/d t.25 r.25
Total 5.20 4.24 2.s2 0.06 12.06 Total 5.20 4.24 2.52 0.06 12.06
Note:
o Profit/ (Loss) to be transferred to P&L A/c is determined on prudence basis, as per WN 2 below.
. In respect of profit-making contracts, the balance profit is called "Reserve Profit', while in respect of loss-making
contracts, the balance is called "Provision against Future Losses" (or) "Reserve for Contingencies". Both Reserve and
Provision constitute Credit balances, and are treated in the same way while disclosing WIP in the Balance Sheet.
. In Contract 729, Current Loss is 1.27 whereas the Worst Loss of 2.52 is to be provided for. The balance 1.25 constitutes
provision for foreseen losses and is hence carried forward as "Provision" (not Reserve Profit).
o Total Column is only for information value.

2. of on
Contract Number 723 726 729 73L
(a) Contract Price 23.20 74.40 10.08 28.80
(b) Work Certified (cumulative) t7.5t 13.26 7.56 4.32

(c) Percentage of Completion _ (b)

75o/o 92o/o 75o/o l5o/o
(a)
(d) Estimated Total Costs (qiven) 20.50 tt.52 12.60 21.60
(e) Estimated Total Profit = (a) -(d) 2.70 2.88 (2.52) 7.20
(0 Notional Profit (as per Contract Arlc) 5.20 4.28 0.27) (0.06)
Least of the Least of the Worct Loss Current Loss
(9) Transfer to P & L Account (See below) (2.52) (o.06)
followins 1.30 following 1.56

For Contract No.723 and 726. least of the followinq is transferred to P&L A,/c (on conseruatism
Formula Contract 723 Contract 726
Work Certified xt7'51 = 2,oq
(a) ETP x 2.70 2.88xL3'26 =2.6s
Contract Pr ice 23.20 L4.40

(b) ETP x
Work Certified
x- Cash Re ceived 2.70x17'51 x 9'57 =1.53 2.88x13'26x
9'oo
Contract Pr ice Work Ceftified 23.20 t2.76 t4.40 13.26
=t.80
Cost till date 9'22
(c) ETP x 2.70x13'15 =t.73 2.88x =2,3o
Estimated Total Costs 20.50 11.52

(d) ETP x
Cost till date x-Cash Re ceived 2.70x13'15 x 9'57 =1.30 z.BB, 9'22 x 9'oo = 1.56
Estimated Total Costs Work Ceftified 20.50 12.76 11.52 L3.26
Work Ceftified
(e) Notional Profit x 5.2oxt7'51 =g,g2 4.28 x13,26 _ 3.g4
Contract Pr ice 23.20 t4.40

ff) NotionalProfit x
Cash Re ceived ?x5.20x9'57 =2.60 ?xc.28x 9'oo =4.35
1" Work Certified 3 t2.76 3 13.26
Note: In the above formulae -
. In Formula (c) and (d), Cost till date = WIP (WC + WUC) less Notional Profit, as per Contract A/c.
6.36
 Contract Costinq

. For calculating percentage of completion, i.". cumulative Work Certified should be mnsidered (i.e.
#m,
including Opening balance of work certified.). However, for considering the percentage of payment,
.i.e. Cash Re ceived Cash Received during that year should be compared with Work Ceftified during
W;rk-Grtitu;, that year (i.e.

excluding Opening balance of Work Certified.)

$l s{r'1€r Contract Accounts - Frofit Recogmition

ABC Ltd, a @6drudion-Company, has undertaken three contracts. The followinq information is qiven -
Particulars Contract A Contract B Contract C
Contract Price 17,60 14.85 24,20
Balance b/ld at the beginning of the year
- Materials on Site 20 30
- WDV of Plant and Machinery 77 3,74
- Wages accrued 5 10
Transactions during previous yeal
Profit previously transferred to P & L 35
- Cost of Work Certified (Cost of Sales) 4,1; 8.14
Transactions during current year
- Materials delivered to site 88 2,20 3,96
- Wages Paid 45 1,@ 2,20
- Salaries and Oher Cost 15 40 50
- WDV of Plant issued to Site 1,90 35
- HO Expenses apportioned for the vear 10 20 50
Balances c/fd at the end of the year
- Materials on Site 20
- WDV of Plant and Machinery 1,50 2; 2,30
- Waoes accrued 5 10 15
Value of Work Certified at end of vear 2,00 8,60 21,00
Cost of Work not certified at end of year 55

The agreed retention is 10% of the Value of Work Certified by the Contractee's Architect. Contract C is scheduled to be handed
over to the Contractee in the near future. lt is estimated that Rs.3,05,000 shall be needed to be spent in addition to what has
been tabulated above, to complete this particular contract. This amount includes an altowance for plant depreciation,
construction services and for contingencies.

Prepare Contract A/cs for each of the three contracts and recommend how much Profit / Loss should be recognized for the year.

Solution: 1. Contract Account for the in Rs.0OOs

Pafticulars A B c Pafticularc A B c
To balances b/d By balances b/d
Work Certified (See Note) 4,L8 8,49 Wages Payable 5 10
Materials at site 20 30
WDV of Plant 77 3,74 By Work-in-Progress
To Materials (for the year) 88 2,20 3,96 Work Ceftified ,,02 tru: 21,00
To Wages (for the year) 45 1,00 2,20 Work Uncertified 55
To Wages Payable c/d 5 10 15 By balances c/d
To Salaries & Other Cost 15 40 50 M_aterials at site 20
To Plant issued (current yr)
To HO Expenses
1,90
10
35
20 50
WDV of Plant
By Loss c/d (bal. figure)
1,50 20 4;
55
To Notional Profit c/d (b/fl L7 4,Ll
Total 3,70 9,40 23,95 Total 3.70 9,40 23,9s
To Loss b/d u: By Notional Profit b/d t7 O,t
To P&L A/c (Profit Transfer) 2,75 By P&L Ay'c (Loss Transfer) 55 _
To Reserve Profit c/d L7 1,36
Total L7 55 4.LL Total L7 55 4,lL

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Students'Handbook on Cost Accounting and Financial Management

I{ote: Since no profit has been previously recognized on Contract A, Value of Work Certified till last Y€or = Cost of Rs3,18
as given in the Question. For Contract C, value of Work Certified = C,ost of Work Certified + Profit recognized last
Y€or=8,!4+35=8,49.
2. of for of ProfIt or on ConfacB
Pafticularc A B c
2'oo 8'60 21'oo
A. Percentage of Completion =
Work Certified
- 11.360lo - 57.9to/o
24,20
- 86.770/o
Contract Pr ice 17,60 14,85
B. Current Year Profit (as per Contract A/c) L7 Loss (55) 4,LL
Nit (ss) Based on Prudence,
C. Profit to be transfened to P&L (< 25o/o complete) Cunent Loss shown below.

Profit to be transfern d as under

Current Year Profit = as per Contract Ay'c above 4,tl
Cost till date = Cost upto last year + Cost this year
= 814 + (30+374+396+220+15+50+5f 10-230) 17,09

Estimated Total Costs = Costs till date (as above) + Fufther Costs to be incurred = L7,09 + 3,05 20,14

Estimated Total Profit = Contract Price (less) Estimated Total C.osts = 24,20 -20,L4 4,06
Profit to be transferred to P&L = Least of the followins (a) to (f) 3.10

(a) Estimated Total Profit x

Work Ceftified
= 4,06 ,# = 3,52
Contractfrice
Work Certified Cash Re ceived
(b) Estimated Total Profit x , = 4,06 *Poeoxgoo/o= 3,17
Contract Price Work Ceftified

(c) Estimated Total Profit x

Cost till date
Estimated Total Costs
= 4,06
"ffi - 3,4s

Cost till date Cash Re ceived

(d) Estimat& Total Profit x = 4,06 = 3,10
Estimated Total Costs Work Ceftified "#x'90o/o
x = 4,Lt r# - 3,s7
(e) Notionatprofit
#ffiH
Cas! n:Ttl{
6 ?
''' 3x Notionat Profit x Work Certified =Zx4,1Lx90o/o=2147

However, this profit is calculated on the basis of the cumulative Cost incurred till the end of the current year' Hence Profit to
be transferred thib year = 3,10 - 35 Profit already taken last yedr = 2,75.

5.38