CONTRACT COSTING
1. If there is more then one contract than maintain separate contract account for the separate contract.
2. If percentage of work completion is given then first always check whether the work uncertified is given or not. If not given then it should be find out from the cost.
E.g Let say cost of the contract is 10,00,000 as on 31.12.2008 and in question it is given that two- third of the contract is completed. Architect’s certificate has been issued covering 50% of the contract price and Rs. 7,50,000 had so far been paid on account. Contract amount is Rs.20,00,000. Calculate the value for work uncertified.
Note: Always remember - The work uncertified shall be calculated on the cost.
First Step – Find out the estimated total cost of the contract:
Cost of two-third of contract is : 10, 00,000.00
Approximate total cost of contract : 15, 00,000.00
(10, 00,000 x 3/2)
Second Step – Find out the Cost of work certified:
Cost contract certified by architect : 7, 50,000.00
50% of total cost (15, 00,000 x 50%)
Third Step – Find out the cost of work uncertified:
Cost of work uncertified : 2, 50,000.00
(Cost of work done – cost of work certified)
(10, 00,000.00 – 7, 50,000.00)
Similar illustration given in module on page no. 6.15.
3. Depreciation on plant & machinery and building used for the contract :- There are two ways to charge the cost of plant & machinery and building in the contract account. Both are allowed but main point is that depreciation is provided only for that period in which plant & machinery and building is used for the contract. Also look the method of depreciation given in question.
4. If in question it is asked to prepare contract account for more than one year, than the closing material at site will be the opening material for the next year. If the same was returned to the store in the first year than nothing has to be done in the next year.
5. If work certified is more than 90% or equal to 90% than first find out the estimated profit given in question. If it is not given in the question then calculate the estimated profit.
After calculating the Estimated Profit the following fomula is applied to transfer profit to the P&L A/c.
Amount Trans. to P&L A/C = Estimated profit x Cash received
Contract price
If Estimated profit cannot be calculated then following formula is used to transfer profit to be to the P& L A/c
Amount Trans. to P&L A/C = Notional profit x Work certified
Contract price
6. Presentation of Work in Progress in the Balance Sheet: (In My Opinion)
Work Certified
Add: Work Uncertified
Less: Cash Received
Less: WIP Reserve
Balance Total Amount will shown on the Assets side of the Balance sheet.
7. If there is escalation clause in the terms of contract. Then revised cost (Claim) will be shown as contractee’s a/c on the credit side of contract account.
8. Must read the Cost of contract and escalation clause for 4 marks theory.
1. If there is more then one contract than maintain separate contract account for the separate contract.
2. If percentage of work completion is given then first always check whether the work uncertified is given or not. If not given then it should be find out from the cost.
E.g Let say cost of the contract is 10,00,000 as on 31.12.2008 and in question it is given that two- third of the contract is completed. Architect’s certificate has been issued covering 50% of the contract price and Rs. 7,50,000 had so far been paid on account. Contract amount is Rs.20,00,000. Calculate the value for work uncertified.
Note: Always remember - The work uncertified shall be calculated on the cost.
First Step – Find out the estimated total cost of the contract:
Cost of two-third of contract is : 10, 00,000.00
Approximate total cost of contract : 15, 00,000.00
(10, 00,000 x 3/2)
Second Step – Find out the Cost of work certified:
Cost contract certified by architect : 7, 50,000.00
50% of total cost (15, 00,000 x 50%)
Third Step – Find out the cost of work uncertified:
Cost of work uncertified : 2, 50,000.00
(Cost of work done – cost of work certified)
(10, 00,000.00 – 7, 50,000.00)
Similar illustration given in module on page no. 6.15.
3. Depreciation on plant & machinery and building used for the contract :- There are two ways to charge the cost of plant & machinery and building in the contract account. Both are allowed but main point is that depreciation is provided only for that period in which plant & machinery and building is used for the contract. Also look the method of depreciation given in question.
4. If in question it is asked to prepare contract account for more than one year, than the closing material at site will be the opening material for the next year. If the same was returned to the store in the first year than nothing has to be done in the next year.
5. If work certified is more than 90% or equal to 90% than first find out the estimated profit given in question. If it is not given in the question then calculate the estimated profit.
After calculating the Estimated Profit the following fomula is applied to transfer profit to the P&L A/c.
Amount Trans. to P&L A/C = Estimated profit x Cash received
Contract price
If Estimated profit cannot be calculated then following formula is used to transfer profit to be to the P& L A/c
Amount Trans. to P&L A/C = Notional profit x Work certified
Contract price
6. Presentation of Work in Progress in the Balance Sheet: (In My Opinion)
Work Certified
Add: Work Uncertified
Less: Cash Received
Less: WIP Reserve
Balance Total Amount will shown on the Assets side of the Balance sheet.
7. If there is escalation clause in the terms of contract. Then revised cost (Claim) will be shown as contractee’s a/c on the credit side of contract account.
8. Must read the Cost of contract and escalation clause for 4 marks theory.
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