Post on 07-Jul-2018
8/18/2019 Notes - Contract Costing
1/13
CONTRACT COSTING
8/18/2019 Notes - Contract Costing
2/13
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
8/18/2019 Notes - Contract Costing
3/13
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.
Fazrul Hanim@UiTM JOHOR 3
8/18/2019 Notes - Contract Costing
4/13
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.
Fazrul Hanim@UiTM JOHOR 4
8/18/2019 Notes - Contract Costing
5/13
PARTIES INVOLVED IN CONTRACT
COSTING
CONTRACTEE
Fazrul Hanim@UiTM JOHOR 5
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
8/18/2019 Notes - Contract Costing
6/13
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
Fazrul Hanim@UiTM JOHOR 6
8/18/2019 Notes - Contract Costing
7/13
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
Fazrul Hanim@UiTM JOHOR 7
8/18/2019 Notes - Contract Costing
8/13
Accounts and Statement
• Construction In Process Account
• Contractee Account
• Statement of Financial Position (SOFP)
(Extract)
– Determination of WIP (Work InProgress)
Fazrul Hanim@UiTM JOHOR 8
8/18/2019 Notes - Contract Costing
9/13
Construction In Process Account
Fazrul Hanim@UiTM JOHOR 9
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
8/18/2019 Notes - Contract Costing
10/13
Contractee account (Acc Receivable)
Fazrul Hanim@UiTM JOHOR 10
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.
8/18/2019 Notes - Contract Costing
11/13
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.
Fazrul Hanim@UiTM JOHOR 11
Cost Basis Surveys of work performed
8/18/2019 Notes - Contract Costing
12/13
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
Fazrul Hanim@UiTM JOHOR 12
8/18/2019 Notes - Contract Costing
13/13
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.
Fazrul Hanim@UiTM JOHOR 13