Points in Contract Costing, Profit on Incomplete Contracts, Escalation Contract costing, also known as terminal costing, is a variant of job. (a) Contract costing is also referred to as 'terminal costing' as the preparation of (b) Contract costing is a form of specific order costing which applies where. Contract dingharbasuppprom.ml - Download as PDF File .pdf), Text File .txt) or read online.
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dkfine contract costing and describe its special features. 0 prepare contract account and ascertain the notional profit on unmmpleted contracts. 0 explain how . In contract costing each contract is treated as a cost unit and costs are contract costing, most of the expenses are of direct nature, overhead forms only a small. In this article we will discuss about: 1. Definition of Contract Costing 2. Features of Contract Costing 3. Accounting Procedure for Contract Costing.
It is also known as terminal costing. Work is executed at customers site The existence of sub contract Most of the expenses incurred upon the contracts are direct. Cost control is very difficult in contract costing.
Types of contracts Generally there are three types of contracts: 1. Fixed price contracts: Under these contracts both parties agree to a fixed contract price.
Fixed price contract with Escalation clause 3. Cost plus contract: Under this contract no fixed price could be settled for a contract. Contract Account A contract account is a nominal account in nature. It is prepared to find out the cost of contract and to know profit or loss made on the contract.
A contractor may undertake a number of contracts at a time. For each contract a separate account is opened. In the contract account all direct cost such as material, labour and other direct expenses incurred during an accounting period are debited and the indirect expenses are apportioned on an equitable basis.
The differences between the two sides are known as Notional profit or notional loss. Special Terms in Contract Account 1.
Work in Progress: It is the unfinished contract at the end of the accounting period and it includes amount of work certified and amount of work uncertified. He may feel that the price he has to pay would not be arbitrary, yet the amount he has to pay is bound to be uncertain.
This he does through what is called an "escalation clause' which states the increase in the contract price for a given increase in the prices of inputs. This implies that the base prices of inputs should be agreed upon and also that the date after which increase in prices will be taken into account will be fixed.
The contractor is not compensated for price changes which could be avoided, for example, by completing the contract on time. It is not necessary that the contractee must agree to the escalation clause; it is a matter of negotiation between the two parties.
Question 2 Discuss briefly the principles to be followed while taking credit for profit on incomplete contracts.
Contract Costing 8. These incomplete contracts may require a few more years for their completion. The figures of profit made the excess of credit over the debit items in a contract on completed contracts can be safely taken to the credit of Profit and Loss Account, but this practice is not being followed in the case of incomplete contracts.
In the case of incomplete contracts the entire profit is not being credited to Profit and Loss Account because some provision is to be made for meeting contingencies and unforeseen losses.
There are no hard and fast rules regarding the calculation of figure of profit to be taken to the credit of profit and loss account. However, the following principles may be followed: i Profit should be considered in respect of work certified and uncertified work should be valued at cost.
The entire amount in such contracts should be kept as reserve for meeting out contingencies. The balance should be allowed to remain as a reserve. The balance should be treated as reserve. By deducting the total estimated cost from the contract price, the estimated total profit of the contract should be calculated.
The proportion of total estimated profit on cash basis, which the work certified bears to the total contract price should be credited to profit and loss account.
Answer These contracts provide for the payment by the contractree of the actual cost of manufacture plus a stipulated profit, mutually decided between the two parties. The main features of these contracts are as follows: 1. The practice of cost-plus contracts is adopted in the case of those contracts where the probable cost of the contracts cannot be ascertained in advance with a reasonable accuracy. These contracts are preferred when the cost of material and labour is not steady and the contract completion may take number of years.
The different costs to be included in the execution of the contract are mutually agreed, so that no dispute may arise in future in this respect.
Under such type of contracts, contractee is allowed to check or scrutinize the concerned books, documents and accounts. Such a contract offers a fair price to the contractee and also a reasonable profit to the contractor. The contract price here is ascertained by adding a fixed and mutually pre-decided component of profit to the total cost of the work.
Question 4 Write notes on Escalation Clause , 4 marks Answer Escalation Clause: This clause is usually provided in the contracts as a safeguard against any likely changes in the price or utilization of material and labour.
If during the period of execution of a contract, the prices of materials or labour rise beyond a certain limit, the contract price will be increased by an agreed amount. Inclusion of such a term in a contract deed is known as an 'escalation clause' An escalation clause usually relates to change in price of inputs, it may also be extended to increased consumption or utilization of quantities of materials, labour etc.
In such a situation the contractor Nov.