notes - contract costing

8/18/2019 Notes - Contract Costing

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CONTRACT COSTING


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Outline

• Definition

• Characteristics of contract costing

• Contract terminology• Construction In Process account

• Contractee account

• Statement of Financial Position(extract)

• Calculation of estimated profit

Fazrul Hanim@UiTM JOHOR 2


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Definition

• Contract costing :

– Is a form of specific order costing, attribution

of costs to individual contracts. (CIMA

terminology) – Usually applies to major long term contracts

rather than short term jobs.

• E.g: civil engineering contracts for buildinghouses, roads, bridges and so on.



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Characteristics

• Job to be carried out is large in value

• Job takes a longer duration of time to complete,

normally more than one accounting period.

• A contract account (Construction in Process Ac)is maintained for each contract undertaken

• Similar to job costing, except different in size,

undertaken to customer special requirement.

• Site oriented, frequently construction work

• Higher proportion of direct costs and low

overhead costs.



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PARTIES INVOLVED IN CONTRACT

COSTING

CONTRACTEE


CONTRACTOR

SUBCONTRACTOR

ARCHITECT

Do other supporting jobs

The party/person who produces

product required by customer The customer who orders jobto be done by contractor.

Certified and valued work done

by contractor


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Contract terminology

terminology definition

Progress billing @

Value of work certified

Value of ‘work done to date’ comfirmed by the surveyor or

architect. They will state the sales value of the work which

has been completed to date.

Progress payment Interim payment made by contractee as the contract

proceeds. Basis of payment is an architect certificate of

work satisfactorily completed.

Cost of work certified It is the cost of sales where this cost is being confirmed byarchitect or surveyor on the day when the value of work

certified is being confirmed

Cost of work

uncertified

Represent the unexpired cost of the current period and only

become expired on the next period



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Contract terminology

terminology definition

Contract Revenue /

price

Is the turnover or sales value of the contract. This will be

claimed by the contractor from the buyer. Contract revenue

may or may not be the same as the value of work certified.

Retention money An amount of money withheld by contractee in order to

secure himself against any defect or incomplete work. The

retention money is normally paid when the contract is fully

completed.

Cost of work done to

date (COWDTD)

Cost incurred by a certain stage of work at a certain period

of time.Estimated future cost Budgeted cost that needs to be incurred in completing the

contract



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Accounts and Statement

• Construction In Process Account

• Contractee Account

• Statement of Financial Position (SOFP)

(Extract)

– Determination of WIP (Work InProgress)



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Construction In Process Account


Material issued from store XXMaterial bought at site XX

Plant at (cost or NBV1) XX

Wages paid XX

Wages accrued c/d XX

Direct expenses XX

Sub-contractor charges XX

Head office charges XX

Expenses accrued c/d XX

COWDTD b/d XX

Attributable profits XX

Material at site b/d XX

Plant at book value (b/d) XX

Expenses prepaid b/d XX

Material return to store XXMaterial at site c/d XX

Material return to supplier XX

Plant at NBV2 (c/d) XX

Expenses prepaid XX

COWDTD c/d XX

Contract revenue XX

Wages accrued b/d XX

Expenses accrued b/d XX


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Contractee account (Acc Receivable)


Progress billing @

Value of work certified XX

XX

Cash/ bank XX

Bal c/d (retention money) XX

XX

Balance c/d XX

XX

Contractee XX

XX

Progress Billing account

•Contractor will bill the customer from time to time according to an agreed

schedule.•When the contractee is billed, the “Contractee Account” (also knows as

Account Receivable) is debited & “Progress B i l ling Accou nt will be

credited.


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Attributable Profit

• Calculation of profit attributed to each accountingperiod.

• 2 methods:

• Loss on contract

If a loss can be estimated to result when the

contract is completed, the whole amount of loss

must be taken into account in the period when the

loss is estimated.


Cost Basis Surveys of work performed


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Work In Progress (WIP)

• In order to prepare the balance sheet, we have to determine the value ofWIP.

• WIP will be valued at the accumulated costs for each period until the

contract is completed.

RM

Cost of work done to date XX

(+) attributable profit XX

(-) Forseeable losses XX

Costruction in progress b/d A(-) Progress payment received/ Value of Work certified

XX

WIP B



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Work In Progress (WIP)

• Figure (A): If (A) is negative, do not proceed to (B). Theamount obtained (negative A) should be shown in the SOFP

under liabilities as “Provision for liabilities and charges”. In

this case, there is no WIP in the Balance Sheet.

• Figure (B): If (B) is negative, the amount should be shown in

the SOFP under liabilities as part of creditors. This amount

represents the excess of progress billing over WIP.

• If (B) is positive, this value will be shown in the SOFP under

Current Assets as WIP.


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