What is a contract account?

A contract account is a record of the amounts of money that have been received from the contractee as well as any payments to be made for materials or work done.

What is contract costing?

Contract costing is a process to estimate the cost of work completed when the contract price cannot be directly identified from the contract documents, such as in the case of an incomplete contract.

What are the methods of contract costing?

The methods of contract costing are the percentage-of-completion method, completed-work method, percentage-of-contract-price method, and special cost method.

What are the three types of costs incurred under a contract?

The three types of costs under a contract are direct, indirect, and overheads.

What is the importance of contract costing?

It provides a means of checking the accuracy of claims for remuneration, it helps in ascertaining the contractor's profits during any particular period, whether the contract is ongoing or completed.

Practical Problems and Solutions About Contract Accounting

Problem 1

A company's contract ledger shows the following details in respect of Contract No. 50, which commenced on 1 April 2019.

The contract was completed by 31 March 2020 at a contract price of $200,000.

The values of the materials and plant returned to store on 31 March 2020 were $6,000 and $12,000, respectively. The contract price was received in full on 31 March 2020.

Required: Prepare a contract account and contractee's personal account.

Solution

Problem 2

The following is the summarized record as on 31 March 2019 relating to Contract No. 414 completed during the year.

Required: Prepare the contract account from the above particulars.

Solution

Problem 3

How to find the tender price from a contractee's account

From the following particulars, write up the Contract No. 5 Account and find the value of the tender (contracted) price.

Provide 60% on productive wages for works overheads and 12.5% on works cost for office overhead. Profit to be realized is 15% on the tender price.

Solution

Problem 4

Work in Progress Account

On 1 April 2019, Contractors Ltd. started building a cinema hall at a contract price of $600,000. During the year ended 31 March 2020, they incurred the following expenses:

Work to the value of $120,000 had been certified on 31 March 2020, of which 75% had been received in cash.

The cost of work completed but not certified was $10,500. Materials valued at $5,000 were on hand at site.

Required: After allowing for depreciation @ 20% p.a. on plant, prepare an account showing the profit earned to date and the amount of profit in the company's accounts on 31 March 2020. Also, prepare a work in progress account.

Solution

Note: Since the value of work certified ($120,000) was less than one-quarter of the total contract price, the entire notional profit of $28,500 has been kept as a reserve for contingencies.

Incomplete Contracts: When work certified is 1/4 (or more than 1/4) of the contract price but less than 1/2 of the contract price.

Problem 5

The following particulars relate to a contract undertaken by a firm of contractors:

The contract price was agreed at $250,000. Cash received from contractee was $180,000.

Required: You are required to prepare a contract account, contractee's account, and show suitable items in the balance sheet of the contractors as on 31 March.