Theory of Contract Costing

Contract Costing

Q. What is contract Costing ?
Ans. Contract is an agreement between two parties contractor and contractee.

Q. What is fixed price Contract ?
Ans. It is a type of contract where both the parties are required to fix a contract price.

Q. What is Cost Plus Contract ?
Ans. This contract is provided for the payment by the contractor of the actual cost of manufacturing and a stipulated profit mutually divided between the two parties.

Q. What is Work Certified ?
Ans. All contractors received payment periodically depending upon the work done by them. A architecture is appointed to inspect the work done and they issue a certificate specifying the value of work completed, which is known as work certified.

Q. What is work not certified ?
Ans. A work done by the contractor but not certified by the contractee architect is called uncertified  work.

Q.What is notional profit or accounting profit ?
Ans. It is the difference between the value of work certified and the cost of work certified.

Q. What is estimated profit ?
Ans. It is the excess of contract price of the estimated total cost of the contract.

Q. What is retention money ?
Ans.A contractor does not received the full payment of the work certified. Contractee retain some amount such as 10%, 20%, etc which is called retention money.

Q. What is escalation clause ?
Ans. The clause is usually provided by the contractor to save good against any likely changes in the price of material and labour.

Q. What are the advantages and disadvantages of Contract Costing ?
Ans.Advantages of Contract Costing:

1. Contractor is assured a fixed percentage of profit.
2. There is no risk of incurring loss on a contract.
3. It is useful specially when the work to be done is not definitely fixed at the time of making the estimate.
4. It simplify the work for preparation of tender.
5. The price is based on actual cost.

Disadvantages of Contract Costing:

1. The contract may not have any inducement to avoid wastage.
2. The duration of cost plus contract tends to be longer than the fixed price one.

Q. What are the rules of transferring Profit or loss on incomplete work ?

Ans. The portion of profit to be credited to Profit or Loss account should depend upon the stage of completion of contract.

This shape of completion of contract should refer to certified work only.

The following formulas are used to find out the amount of profit transfer to Profit or Loss account:

1. When completion of contract is less than 25% :- In this case no profit should be taken to P/L A/C.
2. When completion of contract is up to 25% or more than 25% but less than 50% :- Cash Received / Work Certified X Notional/Accounting Profit X 1/3.
3. When completion of work is up to 50% or more than 50% but less than 90% :-  Cash Received / Work Cost X Accounting Profit X 2/3.
4. When completion of contract is up to 90% or more than 90% :-   Work Certified / Contract price X estimated Profit.

----------------------------------------------the end----------------------------------------