Cost & Management Accounting - Contact Costing

Contract Costing
Question No :- 1

A company undertook a contract for construction of large building complex. The construction
work commenced on 1st April,2020 and the following data are available for the year ended 31st
March,2021
Contract Price ₹35,00,000
Work certified ₹20,000
Progress payments received ₹15,000
Material issued to site ₹7,500
Planning and estimating costs ₹1,000
Direct wages paid ₹4,000
Materials returned from site ₹250
Plant hire charges ₹1,750
Wage related costs ₹500
Site office costs ₹678
Head office expenses apportioned ₹375
Direct expenses incurred ₹902
Work not certified ₹149
The contractors own a plant which originally cost Rs. 20 lacs has continuously in use in this contract
throughout the year. The residual value of the plant after 5 years of life is expected to be ₹ 5
lacs. Straight line method of depreciation is in use.
As on 31st March, 2021 the direct wages due and payable amounted to ₹ 270000 and the materials
at site were estimated at ₹ 200000.
Required:
Prepare the contract account for the year ended 31st March, 2021
Show the calculation of profit to be taken to the profit and loss account of the year.

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Show the relevant balance sheet entries.

Solution:-
Contract A/c
Particular Amt Amt Particular Amt Amt
To Material sent to site 7500 By Work-in-progress
Work Certified 20000
Work Un Certified 149 20149
(-) Material Returned 250 7250 By Closing Material at site 200
To Planning 1000
To Wages 4000
(+) Outstanding Wages 270 4270
To Plant hire charges 1750
To Wage Related 500
To Off Site 678
To Overheads Expenses 375
To Other Expenses 902
To Deprecation of Plant
(20L – 5L) ÷ 5 yrs. 300
To Notional Profit 3324
20349 20349
Extract of Balance Sheet

Liabilities Amount Assets Amount

Outstanding Wages 270 WIP: -
Profit & Loss 3224 Work Certified 20000
Work Uncertified 149 20149
(-) Contractee 15000

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Material at Site 200

Plant at Site 1700

Question No :- 2
A contractor prepares his accounts for the year ending 31st December each year. He
commenced contract on 1st April, 2018 The following information relates to the contract as on
31st December, 2018:
Material issued 251000
Labour charges 565600
Salary to foreman 81300

A machine costing Rs. 2, 60,000 has been on the site for 146 days, its working life is estimated
at 7 years and its final scrap value at Rs. 15000.
A supervisor, who is paid Rs. 8000 p.m. has devoted one-half of his time to this contract.
All other expenses and administration charges amount to Rs. 136500. Material in hand at site
costs Rs. 35400 on 31st December, 2018. The contract price is Rs. 2000000. On 31st
December,2018 two-third of the contract was completed. The architect issued certificates
covering 50% of the contract price, and the contractor had been paid Rs. 750000 on account.
Prepare contract A/c and show how much profit or loss should be included in financial accounts
to 31st December, 2018.

Solution: -
Contract A/c
Particulars’ Amt (₹) Particular’s Amount (₹)
To Material issued 251000 By Work-in-progress
Work Certified 10,00,000
Work Uncertified 2,62,500

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To Labour charges 565600

To Salary foreman 81300
To Deprecation 14000
By Closing material at site 35400
(260000 – 15000 ÷ 7) × 146 × 365
To Supervisor Salary 36000
(8000 × 9 × 1 ÷ 2)
To Other Expenses 136500
To Notional Profit 213250
1297650 1297650

Working Note: - 1
a. Cost to data: -
Particular Amount (₹)
Material Consumed (251000 – 35400) 215600
Wages 565600
Foreman 81300
Deprecation 14000
Supervisor Salary 36000
Other Expenses 136500
1049000

b) Work Complete = 66.66%

Work Certified = 50 %
Work Uncertified = 16.66%
66.66% = 1049000
16.66% = ?
∴ Work Uncertified = 1049000 ÷ 66.66% × 16.66%
= 262171.

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Cost & Management Accounting - Contact Costing

Question No :- 3

Modern Construction Ltd. obtained a contract No. B-37 for ₹ 40 lakhs. The following balances
and information relate to the contract for the year ended 31st March, 2014:
01.04.2013 (₹) 31.03.2014 (₹)
Work-in-progress:
Work certified 9,40,000 30,00,000
Work uncertified 11,200 32,000
Materials at site 8,000 20,000
Accrued wages 5,000 3,000

Additional information relating to the year 2013-2014 are:

(₹)
Materials issued from store 4,00,000
Materials directly purchased 1,50,000
Wages paid 6,00,000
Architect’s fees 51,000
Plant hire charges 50,000
Indirect expenses 10,000
Share of general overheads for B-37 18,000
Materials returned to store 25,000
Materials returned to supplier 15,000
Fines and penalties paid 12,000
The contractive pays 80% of work certified in cash. You are required to prepare:

(i) Contract Account showing clearly the amount of profits transferred to Profit and Loss Account.
(ii) Contracture’s Account.
(iii) Balance Sheet. ( extract )

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Solution: - Contract A/c

Particular Amt Amt Particular Amt Amt

To Work-in-progress b/d By Work-in-progress b/d
Work Certified 940000 Work Certified 3000000
Work Un Certified 11200 951200 Work Un Certified 32000 3032000
To Opening Material at site 8000 By Closing Material at site 20000
To Material issued 400000
(-) Returned 25000 375000
To Material Purchased 150000
(-) Returned 15000 135000
To Wages 600000
(-) Opening Accrued 5000
(+) Closing Accrued 3000 598000
To Architect Fees 51000
To Plant hire 50000
To Indirect Expenses 10000
To General Overheads 18000
To Notional Profit c/d 855800
30,52,000 30,52,000
To Profit & Loss A/c 456427 By Notional Profit b/d 855800
To WIP Reserve c/d 399373

855800 855800

Working Note: -
a. Level of Completion: - 3000000 ÷ 4000000 × 100 = 75%
b. Trf to P/L = 2 ÷ 3 × 855800 × 80% = 456427.

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Contract A/c

Particular Amount (₹) Particular Amount (₹)

To Closing Balance 24,00,000 By Opening Balance 7,52,000
(9, 40,000 × 80%)
By Bank 16,48,000
(30,00,000 – 9,40,000) × 80%
24,00,000 24,00,000

(Extract) Balance Sheet A/c

Liabilities Amount (₹) Amount (₹) Assets Amount (₹) Amount (₹)
Profit & Loss A/c 456427 WIP:
(-) Fines 12000 444427 Work Certified 30,00,000
Accrued Wages 3000 Work Uncertified 32,000
30,32,000
(-) Cash Received 24,00,000
(-) WIP Reserve 3,99,373 2,32,627
Material at site 20,000

Question No :- 4

The following is the Trial Balance of Cosmos Construction Limited, engaged in the execution of
Contract No. 303 for the year ended 31st December 2015:

Contracture’s Account 75% of work certified Rs. 360000

Accumulated depreciation account 50000

Creditors 12000

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Buildings Rs. 200000

Bank balance 45000
Share capital 500000
Materials 200000
Wages 180000
Expenses 47000
Plant 250000
Rs. 922000 922000

The work on contract no. 303 was commenced on 1st January, 2015 .Materials costing Rs. 170000
were sent to the site of the contract but those costing Rs. 6000 were destroyed in an accident.
Plant costing Rs. 50000 was used on the contract all through the year. Plant with a cost of Rs. 2
lakhs was used from 1st January to 30th September, 2015 and was then returned to the stores.

The contract was for Rs. 600000 and the contractive pays 75% of the work certified. The cost
of the work uncertified was estimated to be Rs. 15000 on 31st December, 2015, on which date
materials costing Rs. 4000 were at the site of the contract.

Expenses are charged to the contract at 25% of wages. Plant is to be depreciated at 10%
according to the straight fine method for the entire year.

Prepare Contract No. 303 Account for the year 2015 and make out the Balance Sheet of Cosmos
Construction Limited as on 31st December, 2015.

Solution: -
Working Note: - 1
Analysis of Raw Material Purchases: -

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Particular Amount (₹) Particular Amount (₹)

Raw Material Purchased 200000 Raw Material sent to site 17000
(-) Raw Material sent to site 170000 (-) Loss of Raw Material 6000
Closing Raw Material at go down 30000 Raw Material Used 164000
Raw Material Used = 164000 (Closing Stock = 4000, Consumed = 160000)

Working Note: - 2
Analysis of Expenses: -
Total Expenses Incurred 47000
(-) Expenses Charged to Contract (180000 × 25%) 45000
Expenses Charged from Profit & loss 2000

Working Note: - 3
Analysis of Deprecation
Machine Value Rate Deprecation P.A. Ratio Contract
50000 10% 5000 12:0 5000
200000 10% 20000 9:3 15000
250000 25000 20000

Contract A/c
Particular Amt (₹) Amt (₹) Particular Amt (₹) Amt (₹)
To Material sent to site 170000 By Work-in-progress
Work Certified 480000
Work Un Certified 15000 495000
(-) Abnormal Loss of material By Closing Material at
6000 164000
site 4000

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To Wages 180000
To Expenses (180000 × 25%) 45000
To Depreciation on Machinery 20000
To Notional Profit c/d 90000
499000 499000
To Profit & Loss A/c 45000 By Notional Profit b/d 90000
To WTP Reserve c/d 45000
90000 90000

Profit & Loss A/c

Particular Amt (₹) Particular Amt (₹)
To Abnormal loss of material 6000 By Contract 303 A/c 45000
To Expenses (47000 – 45000) 2000
To Deprecation 5000
To Net Profit Trf to Balance Sheet 32000
45000 45000

Balance Sheet
Liabilities Amt (₹) Amt (₹) Assets Amt (₹) Amt (₹)
Share Capital 500000 WIP: -
Work Certified 480000
Work Uncertified 15000
495000
(-) Cash Received 360000
(-) WIP Reserve 45000 90000
Profit & Loss A/c 32000 Building 200000
Bank 45000

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Creditors 12000 Closing Material in go down 30000

Plant 250000
(-) Provision for 75000 175000
Depreciation (50k + 25k)
Closing Material at site 4000
544000 544000
Working Note: -4
a. Level of Completion: - 480000 ÷ 600000 × 100 = 80%
b. Transfer To P/L: - 2 ÷ 3 × 90000 × 360000 ÷ 480000 = 45000.

Question No :- 5

Modern Construction Ltd. obtained a contract No. B-37 for ₹ 40 lakhs. The following balances
and information relate to the contract for the year ended 31st March, 2014:

01.04.2013 (₹) 31.03.2014 (₹)

Work-in-progress:
Work certified 9,40,000 30,00,000
Work uncertified 11,200 32,000
Materials at site 8,000 20,000
Accrued wages 5,000 3,000
Additional information relating to the year 2013-2014 are:

(₹)
Materials issued from store 4,00,000
Materials directly purchased 1,50,000
Wages paid 6,00,000
Architect’s fees 51,000

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Plant hire charges 50,000

Indirect expenses 10,000
Share of general overheads for B-37 18,000
Materials returned to store 25,000
Materials returned to supplier 15,000
Fines and penalties paid 12,000
The contractive pays 80% of work certified in cash. You are required to prepare:
(i) Contract Account showing clearly the amount of profits transferred to Profit and Loss A/c.
(ii) Contracture’s Account.
(iii) Balance Sheet. ( extract )
Solution: -
Contract A/c
Particular Amt (₹) Amt (₹) Particular Amt (₹) Amt (₹)
To Work-in-progress b/d By Work-in-progress b/d
Work Certified 940000 Work Certified 3000000
Work Un Certified 11200 951200 Work Un Certified 32000 3032000
To Opening Material atsite By Closing Material atsite
8000
20000
To Material issued 400000
(-) Returned 25000 375000
To Material Purchased 150000
(-) Returned 15000 135000
To Wages 600000
(-) Opening Accrued 5000
(+) Closing Accrued 3000 598000
To Architect Fees 51000
To Plant hire 50000
To Indirect Expenses 10000
To General Overheads 18000
To Notional Profit c/d 855800

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30,52,000 30,52,000
To Profit & Loss A/c 456427 By Notional Profit b/d 855800
To WIP Reserve c/d 399373
855800 855800
Working Note: -
a. Level of Completion: - 3000000 ÷ 4000000 × 100 = 75%
b. Trf to P/L = 2 ÷ 3 × 855800 × 80% = 456427.

Contract A/c
Particular Amount (₹) Particular Amount (₹)
To Closing Balance 24,00,000 By Opening Balance 7,52,000
(9, 40,000 × 80%)
By Bank 16,48,000
(30,00,000 – 9,40,000) × 80%
24,00,000 24,00,000

(Extract) Balance Sheet A/c

Liabilities Amount (₹) Amount (₹) Assets Amount (₹) Amount (₹)
Profit & Loss A/c 456427 WIP:
(-) Fines 12000 444427 Work Certified 30,00,000
Accrued Wages 3000 Work Uncertified 32,000
30,32,000
(-) Cash Received 24,00,000
(-) WIP Reserve 3,99,373 2,32,627

Material at site 20,000

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Question No :- 6

Dream house (P) Ltd. is engaged in building two residential housing projects in the city.
Particulars related to two housing projects are as below:

HP-1 (₹) HP-2 (₹)

Work in Progress on 1st April 2013 7,80,000 2,80,000
Materials Purchased 6,20,000 8,10,000
Land purchased near to the site to open an office - 12,00,000
Brokerage and registration fee paid on the above purchase - 60,000
Wages paid 85,000 62,000
Wages outstanding as on 31st March, 2014 12,000 8,400
Donation paid to local clubs 5,000 2,500
Plant hire charges paid for three years effecting from 1st April 2013 72,000 57,000
Value of materials at site as on 31st March, 2014 47,000 52,000
Contract price of the projects 48,00,000 36,00,000
Value of work certified 20,50,000 16,10,000
Work not certified 1,90,000 1,40,000

A concrete mixture machine was bought on 1st April 2013 for ₹ 8, 20,000 and used for 180 days
in HP-1 and for 100 days in HP-2. Depreciation is provided @ 15% p.a. (this machine can be used
for any other projects) As per the contract agreement contractee shall retain 20% of work
certified as retention money.
Prepare contract account for the two housing projects showing the profit or loss on each project
for the year ended 31st March, 2014

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Solution: -

Contract A/c

Particulars HP1 HP2 Particulars HP1 HP2

To WIP b/d 780000 280000 By WIP c/d
To Material Purchased 620000 810000 Work Certified 2050000 1610000
To Wages 97000 70400 Work Uncertified 190000 140000
To Donations 5000 2500
To Plant hire 24000 19000 By closing material at site 47000 52000
To Deprecation of Conc.
60658 33699
Machine
To Notional Profit c/d 700342 586401
2287000 1802000 2287000 1802000

To Profit & Loss A/c 185758 156374 By Notional Profit b/d 700342 586401

To WIP Reserve 513584 430027

700342 586401 700342 586401

Working Note: - 1
Calculation of Deprecation on Contract A/c
HP1 :- 820000 × 15% × 180 ÷ 365 = 60658
HP2:- 820000 × 15% × 100 ÷ 365 = 33699.
Working Note: - 2
HP1 :- 2050000 ÷ 4800000 × 100 = 42.71%
HP2 :- 1610000 ÷ 3600000 × 100 = 44.72%

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b. Transfer to Profit & Loss Accounts

HP1 :- 1 ÷ 3 × 700342 × 80 ÷ 100 = 186758
HP2:- 1 ÷ 3 × 586401 × 80 ÷ 100 = 156374.

Question No :- 7

MNP Construction a contract on April 1, 2019. Actual expenditure in 2019-2020 and estimated
expenditure in 2019-2020 are given below:

2019-2020 (Actual) 2020-2021 (Estimated)

Rs. Rs.
Materials issued 300000 550000
Labour : Paid 200000 250000
: Outstanding at end 20000 30000
Plant purchased 150000 –
Expenses : Paid 75000 150000
: Prepaid at end 15000 –
Plant returns to store (historical cost) 50000 100000
(On Dec. 31,2020)
Material at site 20000 50000
Work certified 800000 Full
Work uncertified 25000 –
Cash received 600000 Full
The plant is subject to annual depreciation @ 25% of WDV Cost. The contract is likely to be
completed on Dec.31, 2020. Prepare the Contract A/c. Determine the Profit on the contract for
the year 2019-2020.

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Cost & Management Accounting - Contact Costing

Solution: -
Contract A/c
Particular Amount (₹) Particular Amount (₹)
To Material Issued 300000 By WIP c/d
Work Certified 800000
Work Uncertified 25000
To Labour 200000 By Closing Material at site 20000
(+) Closing outstanding 20000 220000
To Other Expenses 75000
(-) Closing Prepaid 15000 60000
To Deprecation on Plant: -
50000 × 25% 12500
100000 × 25% 25000
To Notional Profit c/d 227500
845000 845000

To Profit & loss A/c 66321 By Notional Profit b/d 227500

To WIP Reserve c/d 161179
227500 227500

Working Note: -
a. Calculation of Cost to Date
Particular Working Amount (₹)
Material Consumed 300000 - 20000 280000
Labour Paid 200000
(+) Closing Outstanding 20000 220000
Other Expenses Paid 75000
(-) Closing Prepaid 15000 60000

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Deprecation on Plant 50000 × 25% = 12500

100000 × 25% = 25000 37500
597000

b. Calculation of Estimated Further Cost

Particular Working Amount (₹)
Material Consumed (20000 + 550000 – 50000) 520000
Wages Paid 250000
(+) Closing Outstanding 30000
(-) Opening Outstanding 20000 260000
Other Expenses Paid 150000
(+) Closing Prepaid 15000
(-) Opening Prepaid ------ 165000
Deprecation on plant 75000 × 25% × 9 ÷ 12 14063
Estimated Further Cost 959063

C. Calculation Estimated Profit: -

Total Contract Price 1750000
(-) Cost to date 597500
(-) Estimated Future cost 959063 (1556563)
Estimated Profit 193437

a. Profit to be transfer to Profit & loss Account: -

Transfer to Profit & Loss A/c = 193437 × 600000 ÷ 1750000
= 66321

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Question No :- 8

PQR Construction Ltd. commenced a contract on April 1, 2009. The total contract was for Rs 27,
12,500. It was decided to estimate the total profit and to take to the credit of P/L A/c the
proportion of estimated profit on cash basis which work completed bear to the total contract.
Actual expenditure in 2009-10 and estimated expenditure in 2010-11 are given below :
2009-10 Actuals (Rs) 2010-11 Estimated (Rs)

Materials issued 4,56,000 8,14,000

Labor : Paid 3,05,000 3,80,000
: Outstanding at end 24,000 37,500
Plant purchased 2,25,000 —
Expenses
: Paid 1,00,000 1,75,000
: Outstanding at the end — 25,000
: Prepaid at the end 22,500 —
Plant returned to stores 75,000 1,50,000
(at historical cost) (on Dec. 31,2010)
Material at site 30,000 75,000
Work-in-progress certified 12,75,000 Full
Work-in-progress uncertified 40,000 —
Cash received 10,00,000 Full
The plant is subject to annual depreciation @ 20% of WDV cost. The contract is likely to be
completed on December 31, 2010.
Required
(i) Prepare the Contract A/c for the year 2009-10.
(ii) Estimate the profit on the contract for the year 2009-10 on prudent basis which has to be
credited to P/L A/c.
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Solution: -
Dr. Contract A/c Cr.
Particulars Amount Particulars Amount
To Material sent to site 4,56,000 By WIP c/d
To Labor 3,05,000 Work certified 12,75,000
(+) Closing O/S 24,000 3,29,000 Work Uncertified 40,000 13,15,000
To Depreciation on Plant A 15,000
[75,000 × 20%]
To Depreciation on Plant B 30,000 By closing material at site 30,000
[1,50,000 × 20%]
To Expenses 1,00,000
(-) Closing Prepaid 22,500 77,500
To Notional Profit c/d 4,37,500
To P/L 13,45,000 By Notional profit b/d 13,45,000
1,59,263 4,37,500
To WIP Reserve c/d 2,78,237
4,37,500 4,37,500
b). Calculation of estimated profit:
Total Contract Price 27,12,500
(-) Current year cost: Raw material:
Issue: 4,56,000
(-) Closing stock: 30,000 4,26,000
Labour 3,29,000
Depreciation 45,000
Expenses 77,500
(-) Estimated next year cost: Raw material:

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Opening Stock: 30,000

Issue: 8,14,000
(-) Closing Stock: 75,000 7,69,000
Labour 3,80,000
(+) Closing Outstanding 37,500
(-) Opening Outstanding 24,000 3,93,500
Depreciation on Plant B [1,20,000 × 20% × 9/12] 18,000
Others Expenses 1,75,000
(+) Closing Outstanding 25,000
(+) Opening Prepaid 22,500 2,22,500
Estimated Profit 4,32,000
Transfer to P/L:

= 4,32,000 × 10,00,000 = 1,59,263

27,12,500

Question No :- 9

The escalation clause of a long-term contract stipulates the following quantities and rates of
materials of A.B and C and following number of labour hours of X, Y and Z and their rates of pay.
The actuals are shown below:

Standard Actual
Materials Qty Tones Rate Rs. Qty. tones Rate Rs.
A 500 50 750 45
B 1000 30 900 35
C 20 1000 21 1010
Standard Actual
Labor Hours Hourly Rate Hours Hours Rate
X 4800 2.00 4500 2.25

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Y 2400 1.00 3000 1.50

Z 9600 1.50 10000 1.50
Compute the amount of the final claim so far as rate is concerned

Solution:-
Calculation of Escalation Clause
Particular SQ/SH SR AR E. Clause
Material: -
A 500 50 45 (2500)
B 1000 30 35 5000
C 20 1000 1010 200
2700
Labour: -
A 4800 2 2.25 1200
B 2400 1 1.5 1200
C 9600 1.5 1.5 0
2400

Total Escalation Claim = 2700 + 2400 = 5100.

So, the Journal Entire: -
Contractee A/c 5100
To Contract A/c 5100
Question No :- 10

Deluxe Limited undertook a contract for Rs. 500000 on 1st July 2018. closed, the following
details about the contract were gathered:

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Materials Purchased 100000

Wages paid 45000
General Expenses 10000
Plant Purchase 50000
Materials on Hand 30-6-87 25000
Wages Accrued 30-6-87 5000
Work Certified 200000
Cash Received 150000
Work Uncertified 15000
Depreciation of plant 5000
The above contract contained and escalator clause which read as follows:

“In the event of priced of materials and rates of wages increase by more than 5% the contract
price would be increased accordingly by 25% of the rise in the cost of materials and wages beyond
5% in each case”.

It was found that since the date of signing the agreement the prices of materials and wage rates
increased by 25%. The value of the work certified does not take into account the effect of the
above clause.

Prepare the contract account. Working should from part of the answer.

Solution: -
Working Note: - For Escalation Claim

a. Material (100000 – 25000) = 75000

b. Wages (45000 + 5000) = 50000
125000

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In This Question it is mentioned that actual labour & material increased by 25%.
Therefore, Original Estimate = 100000
Therefore Increased = 25000
Increased beyond 5% = 20000
Escalation Clause = 20000 × 25%
= ₹ 5000.
Entry: -
Contractee A/c 5000
To Contract A/c 5000

Contract A/c
Particular Amt (₹) Particular Amt (₹)
To Material Purchased 100000 By WIP c/d
Work Certified 200000
Work Uncertified 15000 215000
To Wages Paid 45000
Outstanding Wages 5000 50000
To General Expenses 10000 By Closing Material at site 25000
To Deprecation 5000 By Contractile (Esc. Claim) 5000
To National Profit 80000
245000 245000
.

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