Ob and Ontract Osting: Learning Outcomes

CHAPTER 9
JOB AND CONTRACT

COSTING
LEARNING OUTCOMES
 Describe Job Costing methods.

 Explain the accounting entries for cost elements under both
the methods.
 Determining cost for a job.
 Ascertain the cost of a contract, Progress payment,
Retention money, Value of work certified, Cost of Work not
certified.
 Discuss Escalation clause, Cost plus contract.
 Compute Notional or Estimated profit from a contract.
© The Institute of Chartered Accountants of India

9.2 COST AND MANAGEMENT ACCOUNTING
Methods of Costing
Specific Order Costing
Job Costing Contract Costing
9.1 JOB COSTING

9.1.1 Meaning of Job Costing
CIMA London defines Job Costing as “the category of basic costing methods
which is applicable where the work consists of separate contracts, jobs or
batches, each of which is authorised by specific order or contract.” According
to this method, costs are collected and accumulated according to jobs, contracts,
products or work orders. Each job or unit of production is treated as a separate
entity for the purpose of costing. Job costing is carried out for the purpose of
ascertaining cost of each job and takes into account the cost of materials,
employees and overhead etc. The job costing method is also applicable to
industries in which production is carried out in batches. Batch production
basically is of the same character as the job order production, the difference
being mainly one in the size of different orders.
9.1.2 Principles of Job Costing

The job costing method may be regarded as the principal method of costing since
the basic object and purpose of all costing is to:
• Analysis and ascertainment of cost of each unit of production
• Control and regulate cost
• Determine the profitability

JOB AND CONTRACT COSTING 9.3
The basic principles enunciated for the job costing method are valid essentially
for all types of industry. For example, printing; furniture; hardware; ship-building;
heavy machinery; interior decoration, repairs and other similar work.
9.1.3 Process of Job costing

• Prepare a separate cost sheet for each job
• Disclose cost of materials issued for the job
• Employee costs incurred (on the basis of bill of material and time cards
respectively)
• When job is completed, overhead charges are added for ascertaining total
expenditure
9.1.4 Suitability of Job Costing

• When jobs are executed for different customers according to their
specifications.
• when no two orders are alike and each order/job needs special treatment.
• Where the work-in-progress differs from period to period on the basis of
the number of jobs in hand.
9.2 JOB COST CARD/ SHEET

Each job order is asymmetrical to other due to specific and customised
requirements. To ascertain cost of a particular job, it is necessary to record all the
expenditure related with a job separately. For this purpose, Job Cost card is used.
Job cost card is a cost sheet, where the quantity of materials issued, hours spent
by different class of employees, amount of other expenses and share of
overheads are recorded. This is helpful in knowing the total cost, profitability etc.
of a job. The following is an illustrative format of Job Cost card/ sheet.
Format of Job Cost Sheet:
JOB COST SHEET

Description: _______________________ Job No.: ________________________
Blue Print No.: ______________________ Quantity: _______________________
Material No.: _______________________ Date of delivery: __________________
Reference No.: ______________________ Date commenced: _________________
Date finished: _____________________

Date Reference Details Material Labour Overhead
Total
Summary of costs Estimated Actual
(`) (`) For the job __________________
Direct material cost Units produced ______________
Direct wages Cost/unit ___________________
Production overhead Remarks ____________________
PRODUCTION COST Prepared by: ________________
Administration and Checked by: _________________
Selling & Distribution
Overheads
TOTAL COST
PROFIT/LOSS
SELLING PRICE
9.3 COLLECTION OF COSTS FOR A JOB

9.3.1 Collection of Materials Cost
An essential requirement of job cost accounting is that direct materials and
their cost must be traced to and identified with specific job or work order.
This segregation of materials cost by jobs or work order is brought by the use of
separate stores requisitions for each job or work order. Where a bill of material is
prepared, it provides the basis for the preparation of these stores requisitions. But
when the entire quantity of materials specified in the bill of materials is drawn in
one lot or in installments, the bill itself could be made to serve as a substitute for
the stores requisition.
After the materials have been issued and the stores requisitions have been priced,
it is usual to enter the value of the stores requisition in a material abstract or

analysis book. It serves to analyse and collect the cost of all direct materials
according to job or work orders and departmental standing orders or expense
code numbers. From the abstract book, the summary of materials cost of each
job is posted to individual job cost sheets or cards in the Work-in-Progress
ledger. The postings are usually made weekly or monthly. Similarly, at periodic
intervals, from the material abstract books, summary cost of indirect material is
posted to different standing orders or expense code numbers in the Overhead
Expenses ledger. If any special material has been purchased for a particular job, it
is generally the practice to charge such special material direct to the job
concerned without passing it through the Stores Ledger, as soon as it is
purchased.
If any surplus material is left over in the case of any job, unless it can be
immediately and economically used on some other job, the same is returned to
the stores with a proper supporting document/stores Debit Note or Shop Credit,
and the relevant job account is credited with the value of excess material returned
to the stores. If the surplus material is utilised on some other job, instead of
being returned to the stores first, a material transfer note is prepared. The
transfer note would show the number of the transfer to job as well as transferee
job (or jobs) so that, on that basis, the cost thereof can be adjusted in the Work-
in-Progress Ledger.
9.3.2 Collection of Labour Cost
All direct labour cost must be analysed according to individual jobs or work
orders. Similarly, different types of indirect labour cost also must be collected
and accumulated under appropriate standing order or expenses code number.
The analysis of labour according to jobs or work orders is, usually, made by
means of job time cards or sheets. All direct labour is booked against specific
jobs in the job time cards or sheets. All the idle time also is booked against
appropriate standing order expense code number either in the job time card for
each job or on a separate idle time card for each worker (where the job time
card is issued job-wise). The time booked or recorded in the job time and idle
time cards is valued at appropriate rates and entered in the labour abstract or
analysis book. All direct employee cost is accumulated under relevant job or
work order numbers, and the total or the periodical total of each job or work
order is then posted to the appropriate job cost card or sheet in Work-in-
Progress ledger. The postings are usually made at the end of each week or
month.

The abstraction of idle time costs under suitable standing order or expenses
code numbers is likewise done and the amounts are posted to the relevant
departmental standing order or expense code number in the Overhead Expenses
Ledger at periodical intervals. As regards other items of indirect labour cost these
are collected from the payrolls books for the purpose of posting against standing
order or expenses code numbers in the Overhead Expenses ledger.
9.3.3 Collection of Overheads
Manufacturing overheads are collected under suitable standing order numbers
and selling and distribution overheads against cost accounts numbers. Total
overhead expenses so collected are apportioned to service and production
departments on some suitable basis. The expenses of service departments are
finally transferred to production departments. The total overhead of production
departments is then applied to products on some realistic basis, e.g. machine
hour; labour hour; percentage of direct wages; percentage of direct materials; etc.
It should be remembered that the use of different methods will lead to a different
amount being computed for the works overhead charged to a job hence to
different total cost. The problem of accurately absorbing, in each individual job or
work order, the overhead cost of different cost centres or departments involved in
the manufacture is difficult under the job costing method. It is because the cost
or the expenses thereof cannot be traced to or identified with any particular job
or work order. In such circumstances, the best that can be done is to apply a
suitable overhead rate to each individual article manufactured or to each
production order. This is essentially an arbitrary method.
9.3.4 Treatment of spoiled and defective work
Spoiled work is the quantity of production that has been totally rejected and
cannot be rectified.
Defective work refers to production that is not as perfect as the saleable
product but is capable of being rectified and brought to the required degree of
perfection provided some additional expenditure is incurred. Normally, all the
manufacturing operations are not fully successful; they result in turning out a
certain amount of defective work. Nonetheless, over a period of time it is possible
to work out a normal rate of defectives for each manufacturing process which
would represent the number of defective articles which a process shall produce in
spite of due care. Defects arise in the following circumstances:

Circumstances Treatment
(1) Where a percentage When a normal rate of defectives has already
of defective work is been established, if the actual number of
allowed in a defectives is within the normal limit or is near
particular batch as it thereto the cost of rectification will be
cannot be avoided. charged to the whole job and spread over
the entire output of the batch. If, on the
other hand, the number of defective units
substantially exceeds the normal, the cost of
rectification of the number which exceeds the
normal will be written off as a loss in the
Costing Profit and Loss Account.
(2) Where defect is due In this case cost of rectification will be
to bad workmanship. abnormal cost, i.e., not a legitimate element of
the cost. Therefore, the cost of rectification
shall be written off as a loss, unless by an
arrangement, it is to be recovered as a penalty
from the workman concerned. It is possible,
however that the management did provide for
a certain proportion of defectives on account
of bad workmanship as an unavoidable
feature of production. If that be the case, the
cost of rectifying to the extent provided for by
the management will be treated as a normal
cost and charged to the batch.
(3) Where defect is due In this case the cost of rectification will be
to the Inspection charged to the department and will not be
Department wrongly considered as cost of manufacture of the
accepting incoming batch. Being an abnormal cost, it will be
material of poor written off to the Costing Profit and Loss
quality. Account.
9.4 ACCOUNTING OF COSTS FOR A JOB

9.4.1 Entries in Control Accounts
1. For purchase of materials-
Stores Ledger Control A/c Dr.

To Cost Ledger Control A/c*

2. For the value of direct materials issued to
jobs-
Work-in-Process Control A/c Dr.
To Stores Ledger Control A/c
3. For return of direct materials from jobs-
Stores Ledger Control A/c Dr.
To Work-in-Process Control A/c
4. For return of materials to suppliers –
Cost Ledger Control A/c Dr.
5. For indirect materials-
Factory Overhead Control A/c Dr.
6. For wages paid-
Wages Control A/c Dr.
To Cost Ledger Control A/c
7. For direct wages incurred on jobs-
To Wages Control A/c
8. For indirect wages –
9. For any indirect expense paid-
To Cost Ledger Control A/c
10. For charging overhead to jobs-
To Factory Overhead Control A/c
11. For the total cost of jobs completed-
Cost of Sales A/c Dr.

To Work-in-Progress Control A/c

12. The balance of Cost of Sales A/c is
transferred to Costing Profit and Loss a/c;
For such transfer –
Costing Profit and Loss A/c Dr.
To Cost of Sales A/c
13. For the sales value of jobs completed -
Cost Ledger Control A/c Dr.
To Costing Profit and Loss A/c**
*General ledger adjustment account is another name of Cost Ledger Control Account.
**The balance of Costing Profit and Loss Account shall now represent profit or loss. The
balance of Cost Ledger Control Account shall be carried forwarded. With the balance on all
the accounts trial balance can be drawn.
ILLUSTRATION 1:
The manufacturing cost of a work order is ` 1,00,000; 8% of the production against
that order spoiled and the rejection is estimated to have a realisable value of
` 2,000 only. The normal rate of spoilage is 2%. RECORD this in the costing journal.
SOLUTION
Actual loss due to spoilage = 8% of ` 1,00,000 = `8,000 and Normal loss = 2% of
` 1,00,000 = `2,000, therefore abnormal loss = `6,000.
The rejection has a realisable value of ` 2,000, which is to be apportioned
between normal loss and abnormal loss in the ratio of 2 : 6.
The accounting entries necessary for recording the above facts would be:
( `) ( `)
Material Control Account Dr. 2,000
Overhead Control Account Dr. 1,500
Costing Profit and Loss Control Account Dr. 4,500
To Work-in-Progress Control Account 8,000
In the case of defectives being inherent in the manufacturing process, the
rectification cost may be charged to the specific jobs in which they have arisen. In
case detectives cannot be identified with jobs, the cost of rectification may be
treated as factory overheads. Abnormal defectives should be written off to the
Costing Profit and Loss Account.

ILLUSTRATION 2
A shop floor supervisor of a small factory presented the following cost for Job No.
303, to determine the selling price.
Per unit (`)

Materials 70
Direct wages 18 hours @ ` 2.50 45
(Deptt. X 8 hours; Deptt. Y 6 hours; Deptt. Z 4 hours)
Chargeable expenses 5
120
Add : 33-1/3 % for expenses cost 40
160
Analysis of the Profit/Loss Account
(for the year 20X9)
(` ) (` )
Materials used 1,50,000 Sales less returns 2,50,000
Direct wages:
Deptt. X 10,000
Deptt. Y 12,000
Deptt. Z 8,000 30,000
Special stores items 4,000
Overheads:
Deptt. X 5,000
Deptt. Y 9,000
Deptt. Z 2,000 16,000
Works cost 2,00,000
Gross profit c/d 50,000 _______
2,50,000 2,50,000
Selling expenses 20,000 Gross profit b/d 50,000
Net profit 30,000 ______
50,000 50,000
It is also noted that average hourly rates for the three Departments X, Y and Z are
similar.

You are required to:

(i) PREPARE a job cost sheet.
(ii) CALCULATE the entire revised cost using 20X9 actual figures as basis.
(iii) Add 20% to total cost to DETERMINE selling price.
SOLUTION
Job Cost Sheet
Customer Details ——— Job No._________________
Date of commencement —— Date of completion _________
Particulars Amount
(`)
Direct materials 70
Direct wages:
Deptt. X ` 2.50 × 8 hrs. = ` 20.00
Deptt. Y ` 2.50 × 6 hrs. = ` 15.00
Deptt. Z ` 2.50 × 4 hrs. = ` 10.00 45
Chargeable expenses 5
Prime cost 120
Overheads:
`5,000
Deptt. X = × 100 = 50% of ` 20 = ` 10.00
`10,000
`9,000
Deptt. Y = × 100 = 75% of ` 15 = ` 11.25
`12,000
`2,000
Deptt. Z = × 100 = 25% of ` 10 = ` 2.50 23.75
`8,000
Works cost 143.75
`20,000
Selling expenses= × 100 = 10% of work cost 14.38
`2,00,000
Total cost 158.13
Profit (20% of total cost) 31.63
Selling price 189.76

9.4.2 Advantages and Disadvantages of Job Costing

Some of the advantages and disadvantages of Job costing are summarised as
below:
Advantages Disadvantages
1. The details of Cost of material, 1. Job Costing is costly and laborious
labour and overhead for all job method.
is available to control.
2. Profitability of each job can be 2. As lot of clerical process is involved
derived. the chances of error is more.
3. It facilitates production 3. This method is not suitable in
planning. inflationary condition.
4. Budgetary control and Standard 4. Previous records of costs will be
Costing can be applied in job meaningless if there is any change in
costing. market condition.
5. Spoilage and detective can be
identified and responsibilities
can be fixed accordingly.
9.4.3 Difference between Job Costing and Process Costing

The main points which distinguish job costing and process costing are as below:
Job Costing Process Costing

(i) A Job is carried out or a product The process of producing the product has a
is produced by specific orders. continuous flow and the product
produced is homogeneous.
(ii) Costs are determined for each Costs are compiled on time basis i.e., for
job. production of a given accounting period
for each process or department.
(iii) Each job is separate and Products lose their individual identity as
independent of other jobs. they are manufactured in a continuous
flow.
(iv) Each job or order has a number The unit cost of process is an average cost
and costs are collected against for the period.
the same job number.

(v) Costs are computed when a Costs are calculated at the end of the
job is completed. The cost of a cost period. The unit cost of a process may
job may be determined by be computed by dividing the total cost for
adding all costs against the job. the period by the output of the process
during that period.
(vi) As production is not Process of production is usually
continuous and each job may standardized and is therefore, quite stable.
be different, so more Hence control here is comparatively
managerial attention is easier.
required for effective control.
9.5 CONTRACT COSTING

Contract costing is a form of specific order costing where job undertaken is
relatively large and normally takes period longer than a year to complete.
Contract costing is usually adopted by the contractors engaged in any type of
contracts like construction of building, road, bridge, erection of tower, setting up
of plant etc. Contract costing have the following distinct features:
1. The major part of the work in connection with each contract is ordinarily
carried out at the site of the contract.
2. The bulk of the expenses incurred by the contractor are considered as
direct.
3. The indirect expenses mostly consist of office expenses, stores and works.
4. A separate account is usually maintained for each contract.
5. The number of contracts undertaken by a contractor at a time is usually few.
6. The cost unit in contract costing is the contract itself.
A contract takes longer period to complete and the result of the contract can
be known only after the completion of the contract. To have a better control
over the contract and cost, it is necessary to have an idea of profitability of
contracts at regular intervals or atleast in a year. For this purpose, a contractor
needs to calculate expected profit or notional profit for a contract. It also helps in
profit comparison for a period and provide a good basis for performance
measurement and evaluation of those who are engaged in the contract. The
expected or notional profit in respect of each contract in progress (i.e. incomplete
contracts) is transferred to the costing profit and loss account (consolidated) for
the year to determine overall profitability of the contractor.

9.6 RECORDING OF CONTRACT COSTS

(i) Material Cost
All materials supplied from the stores or purchased directly for the contract are
debited to the concerned contract account.
Contract Account (Contract No:)…………….……. Dr.
To Stores Ledger Control A/c (Issued from stores) or
To Cost Ledger Control A/c (Direct purchase)
In the case of transfer of excess material from one contract to another, cost of
these excess materials are adjusted on the basis of Material Transfer Note.
Contract Account (Contract No. XYZ) ……………. Dr.
To Contract Account (Contract No. ABC)
In case the return of surplus material appears uneconomical on account of high
cost of transportation, the same is sold and the concerned contract account is
credited with the price realised. Any loss or profit arising therefrom is transferred
to the Costing Profit and Loss Account.
Cost Ledger Control A/c ……………...…Dr.
Costing Profit & Loss A/c (Loss)………. Dr.
To Contract A/c
To Costing Profit & Loss A/c (Profit)
Any loss of material due to theft or destruction etc. is transferred to the Costing
Profit and Loss Account.
Costing Profit & Loss A/c………………. Dr.
To Contract A/c
If any stores items are used for manufacturing tools, the cost of such stores items
are charged to the work expenses account.
Works expenses A/c……………………. Dr.
(With amount of stores used for works)
Contract A/c………………………………. Dr.

To Works expenses
(With amount of works used in the contract)
If the contractee has supplied some materials without affecting the contract price,
no accounting entries will be made in the contract account, only a note may be
given about it.
(ii) Employee Labour Cost
Workers employed on the site of the contract is regarded as direct employees
(irrespective of the nature of the task performed) and the wages paid to them are
charged to the concerned contract directly. If an employee is engaged
concurrently in other contract also then the total wages paid is apportioned to
the contacts on some reasonable basis, usually on time basis.
(iii) Direct Expenses
Direct expenses (if any) are directly charged to the concerned contract account.
To Direct Expenses A/c
(iv) Indirect Expenses
Indirect expenses (such as expenses of engineers, surveyors, supervisors,
corporate office etc.) may be distributed over several contracts on certain
reasonable basis as overheads.
To Overheads A/c
(v) Plant and Machinery
The value of the plant in a contract may be either debited to contract account and
the written down value thereof at the end of the year entered on the credit side
for closing the contract account, or only a charge (depreciation) for use of the
plant may be debited to the contract account.
To Plant and Machinery A/c (with cost)
Plant and Machinery A/c (with WDV) …. Dr.

To Contract A/c
Or
To Depreciation on Plant and Machinery A/c
(vi) Sub-Contract
Sub-contract costs are also debited to the Contract Account.
To Cost of Sub-Contract A/c
Extra work: The extra work amount payable by the contractee should be added
to the contract price. If extra work is substantial, it is better to treat it as a
separate contract. If it is not substantial, expenses incurred should be debited to
the contract account as “Cost of Extra work”.
9.7 MEANING OF THE TERMS USED IN

CONTRACT COSTING
(i) Work-in-Progress: Work-in-progress in contract costing refers to the
contract which is not complete at the reporting date. In Contract Accounts,
the value of the work-in-progress consists of
(i) the cost of work completed, both certified and uncertified;
(ii) the cost of work not yet completed; and
(iii) the amount of estimated/ notional profit.
In the Balance Sheet (prepared for management), the work-in-progress is
usually shown under two heads, viz., certified and uncertified. The cost of work
completed and certified and the profit credited will appear under the head
‘certified’ work-in-progress, while the completed work not yet certified, cost of
material, employee and other expenses which has not yet reached the stage of
completion are shown under the head “uncertified” work-in-progress.
(ii) Cost of Work Certified or Value of Work Certified: A contract is a
continuous process and to know the cost or value of the work completed as on
a particular date; assessment of the completion of work is carried out by an
expert (it may be any professional like surveyor, architect, engineer etc.). The
expert, based on his assessment, certifies the work completion in terms of

percentage of total work. The cost or value of certified portion is calculated

and is known as Cost of work certified or Value of work certified respectively.
Mathematically:
(a) Value of Work Certified = Value of Contract × Work certified (%)
(b) Cost of Work Certified = Cost of work to date – (Cost of work uncertified
+ Material in hand + Plant at site)
(iii) Cost of Work Uncertified: It represents the cost of the work which has
been carried out by the contractor but has not been certified by the expert. It is
always shown at cost price. The cost of uncertified work may be ascertained as
follows:
(`) (`)
Total cost to date xxx
Less: Cost of work certified xxx
Material in hand xxx
Plant at site xxx xxx
Cost of work uncertified xxx
(iv) Progress Payment: A Contractor gets payments for work done on a

contract based on work completion. Since, a contract takes longer period to
complete and requires large investment in working capital to progress the
contract work, hence, it is desirable by the contractor to have periodic payments
from the contractee against the work done to avoid working capital shortage. For
this a contactor enters into an agreement with the contractee and agrees on
payment on some reasonable basis, which generally, includes percentage of work
completion as certified by an expert.
Mathematically:
Progress payment = Value of work certified – Retention money – Payment to date
(v) Retention Money: In a contract, a contractee generally keeps some

amount payable to contractor with himself as security deposit. In a contract, a
contractor undertakes to completed a job work on the basis of pre- determined
terms and conditions and work specifications. To ensure that the work carried out

by the contractor is as per the plan and specifications, it is monitored periodically

by the contractee. To have a cushion against any defect or undesirable work,
the contractee upholds some money payable to contractor. This security
money upheld by the contractee is known as retention money. In some
contracts the contractor has to deposit some security money before staring of the
contract as a term of contract. This is known as Earnest money. If any deficiency
or defect is noticed in the work, it is to be rectified by the contractor before the
release of the retention money. Retention money provides a safeguard against
the risk of loss due to faulty workmanship.
Mathematically:
Retention Money = Value of work certified – Payment actually made/ cash paid
(vi) Cash Received: It is ascertained by deducting the retention money from the
value of work certified i.e.
Cash received = Value of work certified – Retention money
(vii) Notional Profit: It represents the difference between the value of work
certified and cost of work certified. It is determined:
Notional profit = Value of work certified – (Cost of work to date – Cost of work not
yet certified)
(viii) Estimated Profit: It is the excess of the contract price over the estimated
total cost of the contract.
ILLUSTRATION 3:
COMPUTE estimated profit on a 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 2,50,000
contingencies)
Contract price 32,50,000
Work certified 27,50,000

Work uncertified 1,75,000

Cash received 21,25,000
SOLUTION
Calculation of Estimated Profit:
(`)
Estimated further expenditure to complete the contract
(including contingencies)
2,50,000
25,00,000
Estimated profit on contract (Balancing figure) 7,50,000
9.8 COST PLUS CONTRACT

Cost- plus contract is a contract where the value of the contract is determined
by adding an agreed percentage of profit to the total cost. These types of
contracts are entered into when it is not possible to estimate the contract cost
with reasonable accuracy due to unstable condition of factors that affect the cost
of material, employees, etc.
Cost plus contracts have the following advantages and disadvantages:
Advantages:
(i) The Contractor is assured of a fixed percentage of profit. There is no risk
of incurring any loss on the contract.
(ii) It is useful specially when the work to be done is not definitely fixed at
the time of making the estimate.
(iii) Contractee can ensure himself about ‘the cost of the contract’, as he is
empowered to examine the books and documents of the contractor to
ascertain the veracity of the cost of the contract.
Disadvantages - The contractor may not have any inducement to avoid wastages
and effect economy in production to reduce cost.

9.8.1 Escalation Clause in a Contract

Escalation clause in a contract empowers a contractor to revise the price of
the contract in case of increase in the prices of inputs due to some macro-
economic or other agreed reasons. A contract takes longer period to complete
and the factors based on which price negotiation is done at the time of entering
into the contract may change till the contract completes. This protect the
contractor from adverse financial impacts and empowers the contractor to
recover the increased prices. As per this clause, the contractor increases the
contract price if the cost of materials, employees and other expenses
increase beyond a certain limit. Inclusion of such a clause in a contract deed is
called an “Escalation Clause”.
ILLUSTRATION 4
The following expenses were incurred on a contract: ( `)
Materials purchased 6,00,000
Material drawn from stores 1,00,000
Wages 2,25,000
Plant issued 75,000
Chargeable expenses 75,000
Apportioned indirect expenses 25,000
The contract was for ` 20,00,000 and it commenced on January 1, 20X8. The value of
the work completed and certified upto 30th November, 20X8 was ` 13,00,000 of which
` 10,40,000 was received in cash, the balance being held back as retention money by
the contractee. The value of work completed subsequent to the architect’s certificate
but before 31st December, 20X8 was ` 60,000. There were also lying on the site
materials of the value of ` 40,000. It was estimated that the value of plant as at 31st
December, 20X8 was ` 30,000.
You are required to COMPUTE value of work certified, cost of work not certified and
notional profit on the contract till the year ended 31st December, 20X8.
SOLUTION
Contract Account
Particulars (`) Particulars (`)

To Material purchased 6,00,000 By Work-in-progress:
” Stores issued 1,00,000 Value of work 13,00,000

certified
” Wages 2,25,000 Cost of work 60,000
uncertified
” Plant 75,000 ” Material unused 40,000
” Chargeable expenses 75,000 ” Plant less 30,000
depreciation
” Indirect expenses 25,000
” Costing P&L A/c 3,30,000
(Notional profit) (bal.
figure)
14,30,000 14,30,000
ILLUSTRATION 5
A contractor prepares his accounts for the year ending 31st December each year.
He commenced a contract on 1st April, 20X8.
The following information relates to the contract as on 31st December, 20X8:
(`)
Material issued 2,51,000
Wages 5,65,600
Salary to Foreman 81,300
A machine costing ` 2,60,000 has been on the site for 146 days, its working life is
estimated at 7 years and its final scrap value at ` 15,000.
A supervisor, who is paid ` 8,000 p.m. has devoted one-half of his time to this
contract.
All other expenses and administration charges amount to ` 1,36,500.
Material in hand at site costs ` 35,400 on 31st December, 20X8.
The contract price is ` 20,00,000. On 31st December, 20X8 two-third of the contract
was completed. The architect issued certificates covering 50% of the contract price,
and the contractor had been paid ` 7,50,000 on account.
PREPARE Contract A/c and show the notional profit or loss as on 31st December,
20X8.

SOLUTION
Contract Account

To Material issued 2,51,000 By Machine (Working 2,46,000
note 1)
” Wages 5,65,600 ” Material (in hand) 35,400
” Foreman’s salary 81,300 ” Works cost 10,49,000
(balancing figure)
” Machine 2,60,000
” Supervisor’s salary 36,000
(` 8,000 × 9)/2
” Administrative 1,36,500
charges
13,30,400 13,30,400
” Works cost 10,49,000 ” Value of work 10,00,000
certified
” Costing P&L A/c 2,13,250 ” Cost of work 2,62,250
(Notional profit) uncertified
(Working Note 2)
12,62,250 12,62,250
Working notes:
1. Written down value of Machine:
= `2,60,000 − `15,000 ×146days = ` 14,000

7 years 365days
Hence the value of machine after the period of 146 days = ` 2,60,000 –
` 14,000 = ` 2,46,000
2. The cost of 2/3rd of the contract is ` 10,49,000
` 10, 49,000
∴ Cost of 100% " " " " ×3 = ` 15,73,500
2
∴Cost of 50% of the contract which has been certified by the architect is
`7,86,750. Also the cost of 1/3rd of the contract, which has been completed
but not certified by the architect is ` 2,62,250.

ILLUSTRATION 6
M/s. Bansals Construction Company Ltd. took a contract for ` 60,00,000 expected to
be completed in three years. The following particulars relating to the contract are
available:
20X6 (`) 20X7 (`) 20X8 (`)

Materials 6,75,000 10,50,000 9,00,000
Wages 6,20,000 9,00,000 7,50,000
Transportation cost 30,000 90,000 75,000
Other expenses 30,000 75,000 24,000
Cumulative work certified 13,50,000 45,00,000 60,00,000
Cumulative work uncertified 15,000 75,000 —
Plant costing ` 3,00,000 was bought at the commencement of the contract.

Depreciation was to be charged at 25% per annum, on the written down value
method. The contractee pays 75% of the value of work certified as and when
certified, and makes the final payment on completion of the contract.
You are required to PREPARE a contract account for three years and total estimated
profit/ loss from the contract.
SOLUTION
Contract Account (For the year ended 20X6)

To Materials 6,75,000 By Plant at site c/d 2,25,000
(75% of `3,00,000)
” Wages 6,20,000 ” Work-in-progress c/d:
” Transportation 30,000 - Work certified 13,50,000
cost
” Other expenses 30,000 - Work uncertified 15,000
” Plant 3,00,000 ” Costing P&L A/c 65,000
(Loss for the year)
16,55,000 16,55,000

To Plant at site b/d 2,25,000 By Plant at site c/d 1,68,750

(75% of `2,25,000)
” Work-in-progress b/d: ” Work-in-progress c/d:
- Work certified 13,50,000 - Work certified 45,00,000
-Work uncertified 15,000 13,65,000 - Work uncertified 75,000 45,75,000
” Materials 10,50,000
” Wages 9,00,000
” Transportation cost 90,000
” Other expenses 75,000
” Costing P&L A/c 10,38,750
(Notional Profit for the
year)
47,43,750 47,43,750

To Plant at site b/d 1,68,750 By Plant at site c/d 1,26,563
(75% of `1,68,750)
” Work-in-progress b/d: ” Contractee A/c 60,00,000
- Work certified 45,00,000 ” Costing P&L A/c 3,66,187
(Notional Loss for the
year)
-Work uncertified 75,000 45,75,000
” Materials 9,00,000
” Wages 7,50,000
” Transportation cost 75,000
” Other expenses 24,000
64,92,750 64,92,750
Costing Profit & Loss A/c

20X6
To Contract A/c 65,000
(Notional Loss)
20X7
By Contact A/c 10,38,750
(Notional Profit)
20X8
To Contract A/c 3,66,187
(Notional Loss)
To Estimated Profit 6,07,563

from the Contract
10,38,750 10,38,750
ILLUSTRATION 7:
A contractor has entered into a long term contract at an agreed price of ` 17,50,000
subject to an escalation clause for materials and wages as spelt out in the contract
and corresponding actual are as follows:
Standard Actual
Materials Qty (tons) Rate (`) Qty (tons) Rate (`)
A 5,000 50.00 5,050 48.00
B 3,500 80.00 3,450 79.00
C 2,500 60.00 2,600 66.00
Wages Hours Hourly Rate (`) Hours Hourly Rate (`)
X 2,000 70.00 2,100 72.00
Y 2,500 75.00 2,450 75.00
Z 3,000 65.00 3,100 66.00
Reckoning the full actual consumption of material and wages, the company has
claimed a final price of ` 17,73,600. Give your ANALYSIS of admissible escalation
claim and indicate the final price payable.
SOLUTION
Statement showing final claim

Standard Standard Actual Variation in Escalation

Qty/Hrs. Rate (`) Rate (`) Rate (`) Claim (`)
(a) (b) (c) (d) = (c)–(b) (e) =(a) × (d)
Materials
A 5,000 50.00 48.00 (–) 2.00 (–) 10,000
B 3,500 80.00 79.00 (–) 1.00 (–) 3,500
C 2,500 60.00 66.00 (+) 6.00 15,000
Materials escalation claim: (A) 1,500
Wages
X 2,000 70.00 72.00 (+) 2.00 4,000
Y 2,500 75.00 75.00 − −
Z 3,000 65.00 66.00 (+) 1.00 3,000
Wages escalation claim: (B) 7,000
Final claim: (A + B) 8,500
Statement showing final price payable
Agreed price ` 17,50,000

Agreed escalation:
Material cost ` 1,500
Labour cost ` 7,000 ` 8,500
Final price payable ` 17,58,500
The claim of ` 17,73,600 is based on the total increase in cost. This can be verified
as shown below:

Statement showing total increase in cost
Standard Cost Actual Cost Increase/

Qty/hrs Rate Amount Qty/hrs Rate Amount (Decreas
(`) (`) (`) (`) e)
(a) (b) (c) = (d) (e) (f) =(d) g = (f) –

(a)×(b) × (e) (c)
I. Materials
A 5,000 50.00 2,50,000 5,050 48.00 2,42,400 (7,600)
B 3,500 80.00 2,80,000 3,450 79.00 2,72,550 (7,450)
C 2,500 60.00 1,50,000 2,600 66.00 1,71,600 21,600
6,80,000 6,86,550 6,550
II. Wages
X 2,000 70.00 1,40,000 2,100 72.00 1,51,200
Y 2,500 75.00 1,87,500 2,450 75.00 1,83,750
Z 3,000 65.00 1,95,000 3,100 66.00 2,04,600
5,22,500 5,39,550 17,050
23,600
Contract price ` 17,50,000

Add: Increase in cost ` 23,600
The final price claimed by the company ` 17,73,600
This claim is not admissible because escalation clause covers only that part of
increase in cost, which has been caused by inflation.
Note: It is fundamental principle that the contractee would compensate the
contractor for the increase in costs which are caused by factors beyond the
control of contractor and not for increase in costs which are caused due to
inefficiency or wrong estimation.

SUMMARY
♦ Job Costing: The category of basic costing methods which is applicable
where the work consists of separate contracts, jobs or batches, each of
which is authorised by specific order or contract.
♦ Contract Costing: It is a form of specific order costing where job
undertaken is relatively large and normally takes period longer than a year
to complete.
♦ Value of Work Certified: The value of a contract which is certified by an
expert in terms of percentage of total work.
♦ Cost of Work Uncertified: It represents the cost of the work which has
been carried out by the contractor but has not been certified by the expert.
♦ Retention Money: Portion of value of work certified, which is kept by a
contractee as security money for any loss or damage caused by the
contractor.
♦ Cost-plus Contract: A contract where the value of the contract is
determined by adding an agreed percentage of profit to the total cost.
♦ Escalation Clause: A clause in a contract which empowers a contractor to
revise the price of the contract in case of increase in the prices of inputs due
to some macro-economic or other agreed reasons.
TEST YOUR KNOWLEDGE

MCQs based Questions
1. In case product produced or jobs undertaken are of diverse nature, the
system of costing to be used should be
(a) Process costing
(b) Operating costing
(c) Job costing
(d) None of the above
2. The production planning department prepares a list of materials and stores
required for the completion of a specific job order, this list is known as
(a) Bin card
(b) Bill of material

(c) Material requisition slip

(d) None of the above
3. Job costing is similar to that under Batch costing except with the difference
that a
(a) Job becomes a cost unit.
(b) Batch becomes the cost unit instead of a job
(c) Process becomes a cost unit
(d) None of the above.
4. The main points of distinction between job and contract costing includes
(a) Length of time to complete
(b) Big jobs
(c) Activities to be done outside the factory area
(d) All of the above
5. In job costing which of the following documents are used to record the
issue of direct material to a job’
(a) Goods received note
(b) Material requisition
(c) Purchase order
(d) Purchase requisition
6. Which of the following would best describe the characteristics of contract
costing:
(i) homogeneous products;
(ii) customer driven production;
(iii) short period of time between the commencement and completion of
the cost unit
(a) (i) and (ii) only
(b) (ii) and (iii) only
(c) (i) and (iii) only
(d) (ii) only

7. The most suitable cost system where the products differ in type of materials
and work performed is :
(a) Job Costing
(b) Process Costing
(c) Operating Costing
(d) None of these.
8. Which of the following statements is true
(a) Job cost sheet may be used for estimating profit of jobs.
(b) Job costing cannot be used in conjunction with marginal costing.
(c) In cost plus contracts, the contractor runs a risk of incurring a loss.
(d) None of these.
9. Which of the following statements is true
(a) In job costing method, a cost sheet is prepared for each job.
(b) A production order is an order received from a customer for particular
jobs.
(c) In contract costing, the contract which is complete up to one fourth of
the total contract, one-fourth of the profit should be transferred to
Profit & Loss Account.
(d) In contract costing profit of each contract is computed when the
contract is completed.
10. Which of the following statements is true,
(a) Job cost sheet may be prepared for facilitating routing and scheduling
of the job
(b) Job costing can be suitably used for concerns producing uniformly any
specific product
(c) Job costing cannot be used in companies using standard costing
(d) Neither (a) nor (b) nor (c)
Theoretical Questions
1. DESCRIBE job Costing giving example of industries where it is used?
2. DISTINGUISH between Job Costing & Batch Costing?

3. WRITE a note on cost-plus-contracts.

4. WRITE a note on Escalation Clause.
5. EXPLAIN Retention money in Contract costing
Practical Questions
1. In a factory following the Job Costing Method, an abstract from the work-
in-progress as on 30th September was prepared as under.
Job No. Materials Direct hrs. Labour (`) Factory

(`) Overheads
applied (`)
115 1325 400 hrs. 800 640
118 810 250 hrs. 500 400
120 765 300 hrs. 475 380
2,900 1,775 1,420
Materials used in October were as follows:

Materials Requisition No. Job No. Cost (`)
54 118 300
55 118 425
56 118 515
57 120 665
58 121 910
59 124 720
3,535
A summary for labour hours deployed during October is as under:

Number of Hours
Job No.
Shop A Shop B
115 25 25
118 90 30
120 75 10
121 65 --

124 25 10
275 75
Indirect Labour: Waiting of material 20 10
Machine breakdown 10 5
Idle time 5 6
Overtime premium 6 5
316 101
A shop credit slip was issued in October, that material issued under
Requisition No. 54 was returned back to stores as being not suitable. A
material transfer note issued in October indicated that material issued under
Requisition No. 55 for Job 118 was directed to Job 124.
The hourly rate in shop A per labour hour is ` 3 per hour while at shop B, it
is ` 2 per hour. The factory overhead is applied at the same rate as in
September. Job 115, 118 and 120 were completed in October.
You are asked to COMPUTE the factory cost of the completed jobs. It is the
practice of the management to put a 10% on the factory cost to cover
administration and selling overheads and invoice the job to the customer on
a total cost plus 20% basis. DETERMINE the invoice price of these three
jobs?
2. COMPUTE a conservative estimate of profit on a contract (which has been
90% complete) from the following particulars. CALCULATE the proportion of
profit to be taken to Costing Profit & Loss Account under various methods
and give your recommendation.
(`)
Estimated further expenditure to complete the contract
(including contingencies) 25,000
Work certified 5,50,800
Work uncertified 34,000
Cash received 4,40,640
3. AKP Builders Ltd. commenced a contract on April 1, 20X8. The total contract
was for ` 5,00,000. Actual expenditure for the period April 1, 20X8 to March

31, 20X9 and estimated expenditure for April 1, 20X9 to December 31, 20X9
are given below:
Particulars 20X8-X9 20X9-X0

(actual) (9 months)
(estimated)
Materials issued 90,000 85,750
Wages: Paid 75,000 87,325
Outstanding at the end 6,250 8,300
Plant 25,000 -
Sundry expenses: Paid 7,250 6,875
Prepaid at the end 625 -
Establishment charges 14,625 -
A part of the material was unsuitable and was sold for `18,125 (cost being
`15,000) and a part of plant was scrapped and disposed- off for `2,875. The
value of plant at site on 31 March, 20X9 was ` 7,750 and the value of
material at site was ` 4,250. Cash received on account to date was `
1,75,000, representing 80% of the work certified. The cost of work
uncertified was valued at ` 27,375.
The contractor estimated further expenditure that would be incurred in
completion of the contract:
 The contract would be completed by 31st December, 20X9.
 A further sum of `31,250 would have to be spent on the plant and the
residual value of the plant on the completion of the contract would be
`3,750.
 Establishment charges would cost the same amount per month as in
the previous year.
 ` 10,800 would be sufficient to provide for contingencies.
Required: PREPARE a Contract Account for the year ended 31st March, 20X9,
and CALCULATE estimated total profit on this contract.
4. RST Construction Ltd. commenced a contract on April 1, 20X8. The total
contract was for ` 49,21,875. It was decided to estimate the total profit on
the contract and to take to the credit of Costing Profit and Loss A/c that
proportion of estimated profit on cash basis, which work completed bore to
total contract. Actual expenditure for the period April 1, 20X8 to March 31,

20X9 and estimated expenditure for April 1, 20X9 to September 30, 20X9
are given below:
April 1, 20X8 to April 1, 20X9 to

March 31, 20X9 Sept. 30, 20X9
(Actual)(`) (Estimated) (`)
Materials issued 7,76,250 12,99,375
Wages: Paid 5,17,500 6,18,750
Prepaid 37,500 -
Outstanding 12,500 5,750
Plant purchased 4,00,000 -
Expenses: Paid 2,25,000 3,75,000
Outstanding 25,000 10,000
Prepaid 15,000 -
Plant returns to store (historical 1,00,000 3,00,000
cost) (on September 30, (on September 30,
20X8) 20X9)
Work certified 22,50,000 Full

Work uncertified 25,000 -
Cash received 18,75,000 -
Materials at site 82,500 42,500
The plant is subject to annual depreciation @ 25% on written down value

method. The contract is likely to be completed on September 30, 20X9.
Required: PREPARE the Contract A/c for the year ended 31st March, 20X9
and determine the estimated profit on the contract.
ANSWERS/ SOLUTIONS
Answers to the MCQs based Questions
1. (c) 2. (b) 3. (a) 4. (d) 5. (b) 6. (d)
7. (a) 8. (a) 9. (a) 10. (d)
Answers to the Theoretical Questions
1. Please refer paragraph 9.1


Answers to the Practical Questions
1. Factory Cost Statement of Completed Job.
Month Job Materials Direct Factory overheads Factory
No. labour (80% of direct cost
labour cost)
(`) (`) (`) (`) (`)
September 115 1,325 800 640 2765
October 115 -- 125 100 225
Total 1,325 925 740 2,990
September 118 810 500 400 1,710
October 118 515 330 264 1,109
Total 1,325 830 664 2,819
September 120 765 475 380 1,620
October 120 665 245 196 1,106
Total 1,430 720 576 2,726
Invoice Price of Complete Job

Job No. 115 118 120
(`) (`) (`)
Factory cost 2,990.00 2,819.00 2,726.00
Administration and selling
overheads @ 10% of factory cost 299.00 281.90 272.60
Total cost 3,289.00 3,100.90 2,998.60
Profit (20% of total cost) 657.80 620.18 599.72
Invoice Price 3,946.80 3,721.08 3,598.32
Assumption: - Indirect labour costs have been included in the factory

overhead which has been recovered as 80% of the labour cost.

2. Computation of Notional Profit (`)

Value of work certified 5,50,800
Less: Cost of work certified
(` 4,50,000 – ` 34,000) 4,16,000
Notional profit 1,34,800
Computation of Estimated Profit (`)
Less: Cost of work to date 4,50,000
Estimated further expenditure to complete the contract 25,000
Estimated total cost 4,75,000
Estimated profit 1,37,000
3. Contract Account (20X8-X9)
To Materials issued 90,000 By Material sold 18,125
To Wages paid 75,000 By Plant sold 2,875
Add: Outstanding 6,250 81,250 By Plant at site 7,750
c/d
To Plant 25,000 By Material at 4,250
site c/d
To Sundry Expenses 7,250 By Work-in-progress c/d
Less: Prepaid 625 6,625 Work certified 2,18,750
(`1,75,000 ÷
80%)
To Establishment charges 14,625 Work 27,375 2,46,125
uncertified
To Costing P & L A/c 3,125
(`18,125 – `15,000)
To Notional profit (Profit for
the year) 58,500
2,79,125 2,79,125

Calculation of Estimated Profit (`)
(`) (`)
(1) Material consumed (90,000 + 3,125 75,000
– 18,125)
Add: Further consumption 85,750 1,60,750
(2) Wages: 81,250
Add: Further cost (87,325 – 6,250) 81,075
Add: Outstanding 8,300 1,70,625
(3) Plant used (25,000 – 2,875) 22,125
Add: Further plant introduced 31,250
Less: Closing balance of plant (3,750) 49,625
(4) Establishment charges 14,625
Add: Further charges for nine months (14,625 × 9/12) 10,969 25,594
(5) Sundry expenses 7,250
Add: Further expenses 6,875 14,125
(6) Reserve for contingencies 10,800
Estimated profit (balancing figure) 68,481
4. Contract A/c (1-4-20X8 to 31-3-20X9)

To Materials issued 7,76,250 By Plant returned to 1,00,000
Store on 30-9-20X8
To Wages 5,17,500 Less: Depreciation (12,500) 87,500
(1/2)
Less: Prepaid (37,500)
Add: Outstanding 12,500 By Plant at site on
4,92,500 31.3.X9 3,00,000
To Plant purchased 4,00,000 Less: Depreciation (75,000) 2,25,000
To Expenses 2,25,000 By Materials at site 82,500
c/d
Less: Prepaid (15,000) By Work-in-progress c/d

Add: Outstanding 25,000 2,35,000 Work certified 22,50,000

Work uncertified 25,000
To Notional profit 7,66,250 -
26,70,000 26,70,000
Computation of Estimated Profit

Contract A/c (1-4-20X8 to 30-9-20X9)
To Materials issued 20,75,625 By Materials at site 42,500
(7,76,250 +12,99,375)
To Wages 11,42,000 By Plant returned to store 87,500
(5,17,500 - 37,500 + on 30.9.20X8
12,500 + 6,18,750+37,500 (1,00,000 – 12,500)
-12,500 + 5,750)
To Plant purchased 4,00,000 By Plant returned to store 1,96,875
on 30.9.X9 (4,00,000 –
1,00,000 – 1,03,125)
To Expenses 6,10,000 By Contractee A/c 49,21,875
(2,25,000+25,000 -
15,000+ 3,75,000 - 25,000
+ 15,000 + 10,000)
To Estimated profit 10,21,125
52,48,750 52,48,750
Workings:
Calculation of written down value of plant as on 30-9-20X9. (`)
Plant purchased on 1-4-20X8 4,00,000

Less: Plant returned to store on 30-9-20X8 1,00,000
(Depreciation on it `1,00,000 × 25/100 × 6/12 = `12,500)
3,00,000
Less: Depreciation on Balance plant (3,00,000 × 25/100) 75,000
WDV of Plant on 1-4-20X9 2,25,000
Less: Depreciation (2,25,000 × 25/100 × 6/12) 28,125
WDV of plant returned to store on 30-9-20X9 1,96,875

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CHAPTER 9

JOB AND CONTRACT

 Describe Job Costing methods.

© The Institute of Chartered Accountants of India

Specific Order Costing

Job Costing Contract Costing

9.1 JOB COSTING

9.1.2 Principles of Job Costing

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9.1.3 Process of Job costing

9.1.4 Suitability of Job Costing

9.2 JOB COST CARD/ SHEET

JOB COST SHEET

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Date Reference Details Material Labour Overhead

9.3 COLLECTION OF COSTS FOR A JOB

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© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

9.4 ACCOUNTING OF COSTS FOR A JOB

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To Cost Ledger Control A/c*

© The Institute of Chartered Accountants of India

To Work-in-Progress Control A/c

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Per unit (`)

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You are required to:

© The Institute of Chartered Accountants of India

9.4.2 Advantages and Disadvantages of Job Costing

9.4.3 Difference between Job Costing and Process Costing

Job Costing Process Costing

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9.5 CONTRACT COSTING

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9.6 RECORDING OF CONTRACT COSTS

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© The Institute of Chartered Accountants of India

9.7 MEANING OF THE TERMS USED IN

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percentage of total work. The cost or value of certified portion is calculated

(a) Value of Work Certified = Value of Contract × Work certified (%)

(iv) Progress Payment: A Contractor gets payments for work done on a

Progress payment = Value of work certified – Retention money – Payment to date

(v) Retention Money: In a contract, a contractee generally keeps some

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by the contractor is as per the plan and specifications, it is monitored periodically

Cash received = Value of work certified – Retention money

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Work uncertified 1,75,000

9.8 COST PLUS CONTRACT

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9.8.1 Escalation Clause in a Contract

Particulars (`) Particulars (`)

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© The Institute of Chartered Accountants of India

Particulars (`) Particulars (`)

= `2,60,000 − `15,000 ×146days = ` 14,000

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