Page 229 - DCOM202_COST_ACCOUNTING_I

Unit 11: Contract Costing

(d) Sometimes a contract is nearing completion, say, its physical progress is more Notes
than 90% and the contractor is in a position to estimate the future costs with high
degree of accuracy. In such a case, it would the desirable to calculate the profit with
reference to total estimated profit. Total estimated profit is excess of contract price
over total estimated cost. The profit to be transferred to profit and loss account will
be calculated as under:
Profit = Estimated profit × (Work certified/Contract price)
If it is desired to transfer the realised profit to profit and loss account, it will be
calculated as under:
Profit = Estimated profit × (Work certified/Contract price) × (Cash received/
Work certified)
Where,
Estimated Profit = Contract price – Total estimated cost
Total Estimated Cost = Costs incurred upto date + Estimated costs for completion
of contract.

[Important note: If nothing is given in the problem, students are advised to use the
concept of realised profit.]
(xix) Balance Sheet: At the time of preparation of balance sheet, the contractee’s account
deserves a special mention. The contractee’s account is not to be shown as a debtor for the
full contract price unless the work has been completed. Likewise the sum received from
the contractee under various installments should not be shown as a liability on the balance
sheet. On completion of contract, if the contractee still owes the amount to the contractor,
his account is shown as a debtor for the amount due from him. When the contractee pays
full amount, his account is closed and his account will not appear in the balance sheet.
(xx) Target Costing: This is a variation of cost-plus contract. Under target costing method, the
contractee agrees to pay the profit as per the agreement or contract on the total contract
price. In addition to the profit, some times, it is agreed upon by the contractor to complete
the contract within a target price.
In case, if he completes the contract within the target price, he is entitled to receive a bonus
which is in proportion to the savings made, saving being difference between original
contract price and target price.
Compute a conservative estimate of profit on contract (which has been 90% complete) from the
following particulars:

`
Total expenditure to date 22,50,000
Estimated further expenditure to complete the contract (including contingencies) 2,50,000
Contract price 32,50,000
Work certified 27,50,000

Work uncertified 1,75,000
Cash received 21,25,000
Answer
The contract is 90% complete, the method used for transfer of profit to Profit and Loss Account
for the current year will be on the basis of estimated profit on completed contract basis.

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