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  Contract Costing

Introduction to Contract Costing

Contract Costing is a method employed in construction industry to carry out the cost and profit of a specific construction assignment. The standards of job costing are also appropriate in contract costing. Actually Contract Costing can be known as an extension of Job Costing because each contract is not anything but a job completed. Contract Costing is employed by concerns such as civil engineering contractors, construction firms, and engineering firms.

One of the significant features of contract costing is that several of the expenses can be traced to a specific contract. Those expenses which cannot be traced to a specific contract are apportioned to the contract on a number of appropriate basis. The cost computation in case of a contract is completed on the following basis.

A. Material Cost:

 Direct Material needed for a specific contract is debited to the Contract Account. There might be a number of quantities of material that is returned back to the store. In such types of cases, material returned note is ready and is either credited to the Contract Account or subtracted from the material debited to the Contract Account. The same treatment is provided to the material transferred from one contract to other one. Material Transfer Note is ready to record these transactions of transfer. Material remaining at the site at the end of a specific accounting period is displayed because closing stock after valuation of the same and forward to the next period.

B. Labor Cost:

Wages paid to the workers occupied on a specific contract should be charged to that contract irrespective of the work performed through them. If there are general workers on more than one contract and/or if the workers are transferred from one contract to another, time sheets might be kept and wages might be distributed on the basis of time spent on each contract. A number of the workers might be working in the central office or central stores, their wages could be apportioned to a specific contract on suitable basis such as time spent etc.

C. Expenses:

All expenses acquired for a specific contract should be charged to that contract. In case of any indirect expenses acquired for the organization like a whole, they should be charged to the contract on some appropriate basis. Direct expenses could be charged straight to the contract.

D. Plant and Machinery:

Depreciation on the plant and machinery employed for the contract is to be charged to the contract account. The depreciation might be charged on of the following basis.

Ø   If a plant is particularly purchased for a specified contract and is supposed to be employed for the contract for long time, so being exhausted at site, the total cost of the plant would be debited to the contract account. After the finishing point of the contract, if it is no longer needed, it will be sold at the site itself and the sale continues are credited to the contract account. If it is not sold, the contract is credited along with the depreciated [revalued amount value]. So the amount of depreciation is debited to the contract account. The major disadvantage of this technique is that the debit side of the contract account is not necessarily inflated along with the cost of the plant value and so the cost of contract is displayed very high. For removing this disadvantage, the variation among the original cost at the commencement of the contract and the depreciated value latterly of the period is carried out and charged to the contract account as depreciation.

Ø   If a plant is employed for a contract for a short period, there is no requirement of debiting the cost of the plant to the contract account. The amount of depreciation is carried out on the base of per hour and charged to the contract on that basis. The hourly rate is calculated by dividing the depreciation and other operating expenses of the plant through the total estimated working hours of the plant.

Ø   Occasionally plants may be taken on hire for a specific contract. In such types of cases the amount of rent paid has to be debited to the contract account.

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