What is Contract Costing?
Contract costing is the process of keeping track of the costs of a contract with a client. This is what a contract account is in relation to contract costing. For illustration, when a firm and a possible customer make an offer on a big construction project together, they agree on a deal that the company will get a certain amount of money back. At least some of this payment is based on how much it costs the company to meet the contract's terms and conditions. The firm must then keep track of the costs related to that contract account format to explain to the client why it charges what it is.
Meaning of Contract Costing
Types of Contract Costing
The following are the types of contract costing:
Fixed Price Contracts:
Under a fixed-price contract, the firm is paid a set amount to finish the project, including payments along the way. Under this deal, the business intends to perform contract costing to put together all of the costs related to the construction proposal and see if it made a profit.
Cost Plus Contract:
In a cost-plus contract, the business gets paid back for its incurred costs and a fixed proportion of profit. Under this plan, the conditions of the contract will require the firm to keep track of the expenses associated with the project to ask the client for money back. Based on the size of the project, the consumer may send an auditor to look at the company's cash flows and may not permit a few of them. You can access the contract costing PDF online.
Importance of Contract Costing
Significance of Contract Costing
Contracts are signed at a site that is not on the property of either the executor or the contractor. Contracts are big jobs that might last longer than one accounting cycle. Every contract is considered a different cost unit when determining how much something costs.
The binding contract costing features is that the arrangements are carried out based on the details given by the contractee. As the majority of the work is done at the premises of the agreement, most of the costs to be paid are direct. The contractor signs the contract in exchange for an agreed-upon amount called the contract price. The contractee pays the contractor in installments based on how much work has been done and how the contractee's engineer or architect certifies that the job is done.
Work-in-Progress Accounting
State the WIP in Contract Costing
Work in progress (WIP) is a term for goods that are still being made but are only partly done. The production procedure may be changing these items right now, or they may be waiting in line in front of a manufacturing work area. Work in progress generally includes the raw materials needed for a product because they are added at the start of production and the cost of extra processing as every unit moves through the different steps of making it. Get contract account problems with solutions PDF online.
For an unfinished contract, the amount of work-in-progress to be put on the credit column of a contract account is:
Work Certified:
When a big contract is made, the contractee sends the contractor payments over time. These amounts are paid in exchange for invoices from the contractee's architect, surveyor, or engineer that show how much the work done so far is worth. Work certified is the work done by the contractor that has been signed off on as done by the contractee's architect or engineer (or work completed and certified).
Work Done but Not Certified:
Uncertified work is work completed on an unfinished contract but hasn't been signed off on by the contractee's architect or engineer or work done but not certified. Work that has been done but hasn't been certified since the last certification should be valued depending on how much it costs. Here, the contract costing format is where all the costs for that contract are kept. Also, any indirect expenses in the profit and loss account from selling plants or materials should be moved to the profit and loss account through "abnormal goods."
Conclusion
Contract costing is like job costing. However, it is not the same. In contract cost accounting, the cost of each contract is computed individually, and a different account is opened for each contract in the contractor's books. To determine the gain or loss, the overall cost of the contract is split into two parts: work certified and work uncertified. Contract costing is a big job where work is performed on the site of the contractee, not in the factory, unlike job costing.
FAQs on Contract Accounts: Abnormal Loss and Depreciation Explained
1. State reasons why the profit of an incomplete contract is ascertained.
At the close of an accounting period, when a contractor has a handful of contracts in different phases of completion, the work-in-progress accounting is usually valued at cost, and no profit is taken into account until the contracts are finished. There is no disagreement about handling a loss on an incomplete agreement or making a profit on a preliminary agreement. But the loss on an unfinished contract in any given year should be moved to that year's Profit and Loss Account.
2. What is the treatment for abnormal loss?
When a company or any firm has a loss exceeding the normal loss threshold, this is called an "abnormal loss. Some things, like theft, damage to goods from low-quality materials or equipment that doesn't work right, etc., can cause a loss that isn't normal. From a contracting accounting point of view, a contract account abnormal loss and depreciation is a loss that happens on top of the average loss and affects the company. These causes should be addressed and rectified quickly to prevent harm and losses.
3. Define treatment of plant & machinery under contract.
Suppose the machinery and equipment/ plant at the site are used for the contract extended for a long period, till the end of the accounting period. In that case, the original cost of the plant should be deducted from the contract, and the depreciated cost should be added. If a plant or piece of equipment is used for more than one contract, the operating costs (depreciation) should be calculated and charged to each contract depending on a set hourly rate for the time it was used.
