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Unit 11: Contract Costing
(ix) Contract costing is adopted in long-term contracts whereas the job costing is confined to Notes
finished goods for a small duration of time.
(x) In contract costing, the profit and loss can be ascertained in either completed or uncompleted
stages while in the job costing it’s done only on the stage of completion.
The procedure for costing of contracts is as follows:
(i) Contract Account: Every contract is allotted a separate number and a separate account is
opened for each contract.
(ii) Direct Costs: Most of the costs of a contract can be allocated direct to the contract. All such
direct costs are debited to the contract account. Direct costs for contracts include:
z Cost of direct materials,
z Cost of direct labour,
z Cost of direct expenses,
z Cost of supervision,
z Depreciation of plant and machinery, and
z Sub-contract costs.
(iii) Indirect Costs: Indirect costs are often absorbed on some arbitrary basis as a percentage on
prime cost or materials or wages, etc. Overheads are normally restricted to head office and
storage costs.
(iv) Transfer of Materials or Plant: When materials, plant, etc. are transferred from the contract,
the contract account is credited by that amount.
(v) Contract Price: The contract account is also credited with the contract price. However, when
a contract is not completed at the end of financial year, the contract account is credited with
the cost/value of the work-in-progress as on that date. Work-in-progress includes value of
certified work and the cost of uncertified work.
(vi) Profit or Loss Account: The balance of contract account represents profit or loss which is
transferred to profit and loss account. However, when contract is not completed within the
financial period, only the part of the profit arrived is taken into account and the remaining
profit (balance profit) is kept as reserve to meet any contingent loss on the complete portion
of the contract.
Notes Contract account is also debited with overheads which tend to be small in relation
to direct costs.
11.2 Contract Ledger
A contract is known by the number allotted to it, as for instance, Contract No. 401, Contract No.
402 and so on. This number and the terms and conditions of the contract pertaining to it are
recorded in the contract ledger. A specimen of the contract ledger is given below:
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