COST ACCOUNTING

Problems on Contract Costing

Short Problems

1. How much of profit, if any, would you allow to be considered in the following case ?
Contract cost Rs. 2,80,000; Contract Value Rs. 5,00,000; Cash received Rs.
2,70,000;
Uncertified work Rs. 30,000. Deduction from bills by way of security 10 %.

2. Calculate the amount of profit to be transferred to profit and loss account from the
following particulars relating to a contract :
Contract Price Rs. 16,00,000; Cash received from the Contractee (being 70 % of work
certified) Rs. 4,90,000; cost of work not yet certified Rs. 60,000; total expenditure
incurred on the contract Rs. 6,40,000.

3. Calculate the amount of profit transferable to Profit and Loss Account from the following :
Contract Price Rs. 25 Lakhs; Cash received from the Contractee (being 80 % of work
certified) Rs. 12 Lakhs; Uncertified work Rs. 50,000; Actual expenditure incurred on
the contract Rs. 10 Lakhs (including closing stock of materials at contract site). Closing
stock at contract site Rs. 40,000.

4. Compute a conservative estimate of profit on a contract (which is almost 80 % complete)

from the following particulars.

Rs.
Total expenditure to date 85,000
Estimated further expenditure to complete the contract
(including contingencies) 17,000
Contract price 1,53,000
Work Certified 1,00,000
Work not certified 8,500
Cash received 81,600

5. At 31st December 1997, Rs. 4,86,000 has been expended upon a contract and the
value of work certified was Rs. 5,25,000. The cost of work performed but not yet
certified is Rs. 15,000. The contract has reached a stage wherein future expenses can
be estimated with a fair degree of accuracy. Such expenses are estimated at Rs.
1,00,000. However, a provision of 2 % on contract value is desired for contingencies.
The contract price is Rs. 7,00,000 and payment received till date is Rs. 5,00,000.
Calculate the profit to be taken to the credit of profit and loss account for the year ending
31-12-1997.
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Main Problems
1. Following amounts have been spent on a contract still incomplete on 31-3-1997.
Material Rs. 80,000; Wages Rs. 70,000; Direct Charges Rs. 50,000; Rs. 2,00,000
have been received from the Contractee being 80 % of the work certified. Calculate
profit to be credited to profit and loss account. Uncertified stock in progress being Rs.
10,000. Total value of the contract is Rs. 4,00,000.

2. A building contractor, having undertaken construction work at a contract price of Rs.

6,00,000 began the execution of the work on 1st January 1979. The following are the
particulars of the contract up to 31st December 1979.
Rs.
Material issued from stores 4,000
Materials purchased 1,20,000
Labour at site 1,00,000
Indirect expenses 36,000
Plant 1,40,000
Material returned to stores 8,000
Material lost by fire 2,000
st
Materials at site on 31 December 1979 4,000
st
Plant at site on 31 December 1979 1,20,000

Cash received on account up to 31st December amounted to Rs. 2,24,000 representing

80 per cent of the work certified, the remaining 20 per cent being retained until
completion. The work finished but not certified was Rs. 40,000. Prepare the Contract
Account and state the proportion of profit the contractor would be justified in taking to the
credit of the profit and loss account. Also prepare Contractee’s Account.

3. Prepare a Contract account from the following particulars :

Rs.
Materials issued from stores 2,00,000
Materials purchased 1,60,000
Plant Installed at site 50,000
Establishment charges 40,000
Material returned to stores 10,000
Wages paid 1,40,000
Wages accrued 20,000
Direct Expenses 6,000
Indirect Expenses 14,000
Material transferred to another account 30,000
Materials on hand 40,000
Depreciation on plant 20 %
Contract Price 10,00,000
Work Certified 5,00,000
Cost of work not yet certified 50,000
 Cash received from the Contractee 4,00,000
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4. A PWD Contractor’s accounting year ends on 31st December every year. The
following particulars relate to contract No. 714, which remains incomplete on 31st
December 1975.
Rs.
Wages paid 81,000
Material used 84,000
Plant sent to site 12,400
Direct expenses paid 4,600
Value of plant on 31-12-1975 10,000
Work certified by Engineer 2,00,000
Cost of work not yet certified 3,300
Agreed contract price 2,50,000
Cash received 1,80,000
Wages accrued on 31-12-1975 1,560
Direct expenses accrued on 31-12-1975 320
Establishment charges applicable to work No. 714 13,680
Material on hand on 31-12-1975 2,260
Prepare contract account crediting profit and loss account with two thirds of profit as
reduced to the cash received.

5. A building contractor having undertaken construction work at contract price of Rs.

6,00,000 began execution of the work on 1st January 1980. The following are the
particulars of the contract up to 31st December 1980.
Rs.
Materials 1,20,000
Wages 1,38,000
Plant 30,000
Establishment charges 11,100

Cash received on account up to 31st December 1980 amounted to Rs. 2,70,000

representing 80 % of the work certified, the remaining 20 per cent being retained until
completion. The value of materials on hand was Rs. 8,100 and the work finished but
not certified was Rs. 7,500. Prepare the Contract Account assuming depreciation on
plant at 10 % per annum and state the proportion of profit the contractor would be
justified in taking to the credit of the profit and loss account. Also show the work in
progress would appear in the Balance Sheet as on 31st December 1980.

6. A building contractor having undertaken construction work at a contract price of Rs.

2,50,000 began the work on 1st January 1980. The following are the particulars of the
contract up to 31st December 1980.
Rs.
Material sent to site 85,349
Labour engaged on site 74,375
Plant installed at site 15,000
 Direct Expenditure 3,167
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Establishment charges 4,126

Materials returned to stores 549
Work certified by architects 1,95,000
Cost of work not yet certified 4,500
st
Material on hand on 31 December 1980 1,883
st
Wages accrued due on 31 December 1980 2,400
st
Direct Expenditure accrued on 31 December 1980 240
Value of plant on 31-12-1980 11,000
Cash received from contractee 1,80,000
rd
You are required to take credit for 2/3 of the profits earned on the work certified by the
architect but only to the extent of work paid. Prepare the Contract Account.

7. Contractors Ltd., entered into a large contract with an Electric supply company on 1st
January 1981. The contract was incomplete as on 30th June 1981. From the following
information, prepare Contract Account and show the entries relating to the contract
which would appear in the profit and loss account of Contractors Ltd., for the year ended
and in the balance sheet as at 30th June 1981. The directors wish to take to the profit
and loss account 2/3rd of profit earned on the incomplete contract for work done as
shown by the Architects certificate but only to the extent of the work paid for.
Rs.
st
Plant installed at site on 1 January 1981 45,000
Material sent on site 1,71,250
Labour charges paid 1,72,500
Direct Expenditure 7,250
Establishment charges 8,875
Material returned to stores 1,125
Architects certificate 3,50,000
th
Cost of work not certified on 30 June 1981 7,500
th
Stock of materials on 30 June 1981 4,500
Wages accrued to 30th June 1981 4,750
Direct expenses accrued 500
Contract price 5,00,000
Cash received on account 2,75,000
Allow depreciation on plant at 20 % per annum.

8. The Hyderabad Construction Company Ltd., has undertaken the construction of a bridge
over the river Musi for Hyderabad Municipal Corporation. The value of the contract is
Rs. 25,00,000 subject to a retention of 20 % until one year after the certified completion of
the contract and final approval of the Corporation’s engineer. The following are the
details as shown in the books on 31st December 1976.
Rs.
Labour on site 8,10,000
Materials direct to site less returns 8,40,000
Materials from stores 1,62,400
 Hire and use of plant, plant upkeep account 24,200
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Direct Expenses 46,000

General Overheads allocated to the contract 74,200
Material on hand on 31-12-1976 12,600
Wages outstanding on 31-12-1976 15,600
Direct expenses outstanding on 31-12-1976 3,200
Work not yet certified at cost 33,000
Amount certified at cost 22,00,000
Cash received on account 17,60,000
Prepare Contract Account and the Hyderabad Municipal Corporation’s Account.

9. The following information relates to contract No. 125. You are required to prepare the
Contract Account and Contractee Account assuming that the amount due from the
Contractee was duly received.
Rs.
Direct materials 20,250
Direct wages 15,500
Stores issued 10,500
Loose tools 2,400
Tractor Expenses :
Running materials 2,300
Wages of Drivers 3,000 5,300
Other direct expenses 2,650

The contract price was Rs. 90,000 and the contract took 13 weeks for its completion.
The value of loose tools and stores returned at the end of the period were Rs. 200 and
Rs. 3,000 respectively. The plant was also returned to a value of Rs. 16,000 after
charging depreciation at 20 %. The value of tractor was Rs. 20,000 and depreciation
was to be charged to the contract at 15 % per annum at cost. The administration and
office expenses are to be provided at 10 % of Works Cost.

10. A firm of building contractors began to trade on 1-4-1980. The following was the
expenditure on the contract for Rs. 3,00,000.
Rs.
Material issued to contract 51,000
Plant used for contract 15,000
Wages incurred 81,000
Other expenses 5,000

Cash received on account to 31-3-1981 amounted to Rs. 1,28,000 being 80 % of the

work certified. Of the plant and materials charged to the contract, plant, which cost Rs.
3,000 and materials which cost Rs. 2,500 were lost. On 31-3-1981, plant which cost
Rs. 2,000 was returned to stores, the cost of work done but uncertified was Rs. 1,000
and materials costing Rs. 2,300 were in hand on site. Charge 15 % depreciation on
 plant and take to the profit and loss account 2/3rd of the profit received. Prepare a
contract account and balance sheet from the above particulars.
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11. A railway contractor makes up his accounts to 31st March. Contract No. SER / 15 for
construction of a culvert between Bhilai and Rajpur commenced on 1st July 1977. The
costing records yield the following information at 31st March 1978.
Rs.
Material charged out to site 31,540
Labour 75,300
Foreman’s salaries 11,700

A machine costing Rs. 25,000 has been on site for 73 days. Its working life is
estimated at five years and its final scrap value at Rs. 1,000. A supervisor who is paid
Rs. 18,000 p.a. has spend approximately six months on this contract. All administration
and other expenses amount to Rs. 17,000. Materials in store at site at the end of the
year cost Rs. 2,500. The contract price is Rs. 3,00,000. At the end of the year, 2/3 of
the contract was completed for which amount, the Architects certificate has been issued
and Rs. 1,60,000 has so far been received on account. It was decided that the profit
made on the contract in the year should be arrived by deducting the cost of work certified
from the total value of the architects certificate, that 1/3 of the profit so arrived at,
should be regarded as a provision against contingencies and that such provision should
be increased by taking to the credit of P & L A/c only such proportion of the 2/3rd profit
as the cash received bore to the work certified.

12. Engineer Ltd., undertook two contracts on 1st April and on 1st July respectively, in
1972. Their account showed the following position on 31st December 1972.
Contract I Contract II
Rs. Rs.
Contract Price 1,20,000 1,00,000
Work Certified 80,000 64,000
Work Uncertified 2,400 3,200
Materials 28,500 23,000
Wages 44,000 45,000
General Expenses 1,900 1,300
Cash received in respect of work certified 60,000 48,000
Wages accrued 1,400 1,500
General Expenses accrued 300 200
Plant installed 8,000 6,400
Materials on hand 1,400 1,520
On the respective dates of the contracts, the plant was installed, depreciation thereon
being taken at 15 % p.a. Write up the Accounts in the Contract Ledger and ascertain
the P & L A/c on each contract. Indicate the amount that should be transferred to the P
& L A/c for the year ended 31st December 1972.
13. Three contracts commencing on 1st January, 1st July and 1st October 1980
respectively, were undertaken by a contractor and their accounts on 31st December
1980 showed the following position.

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Contract I Contract II Contract III

Contract Price 4,00,000 2,70,000 3,00,000
Expenditure :
Materials 72,000 58,000 20,000
Wages paid 1,10,000 1,12,400 14,000
General Charges 4,000 2,800 1,000
Plant Installed 20,000 16,000 12,000
Materials on hand 4,000 4,000 2,000
Wages accrued 4,000 4,000 2,000
Work certified 2,00,000 1,60,000 36,000
Cash received in respect thereof 1,50,000 1,20,000 27,000
Work finished but uncertified 6,000 8,000 2,000

The plant is installed on the date of commencement of each contract, depreciation

thereon is to be taken at 10 % p.a. Prepare Contract Accounts in tabular form.

14. Prepare Contract Account from the information given below :

1988 -- 89 1989 -- 90
Rs. Rs.
Materials 3,00,000 84,000
Wages 2,30,000 1,05,000
Outstanding Expenses 35,000 15,400
Materials at the end 13,000 7,000
Cash received 6,00,000 10,00,000
Certified completion of work 75 % 100 %

15. Prepare (a) Contract Account and (b) Contractee Account for the years 1992 and
1993 taking into consideration such profit for transfer to Profit and Loss Account as you
think proper.
1988 -- 89 1989 -- 90
Rs. Rs.
Materials issued 3,00,000 84,000
Direct Wages 2,30,000 1,05,000
Direct Expenses 22,000 10,000
Indirect Expenses 6,000 1,400
Work Certified 7,50,000 10,00,000
Work Undertified 8,000 -------
Materials at site 5,000 7,000
Plant issued 14,000 2,000
 Cash received from contractee 6,00,000 10,00,000

The value of the Plant at the end of 1992 was Rs. 7,000 and at the end of 1993 Rs.
5,000.
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16. Mr. Ravi Kumar undertook a contract for Rs. 15,00,000 on an arrangement that 80 %
of the value of the work done as certified by the architect of the Contracteee, should be
paid immediately and the remaining 20 % be retained until the contract was completed.
In 1979, the amounts expended were :
Rs.
Materials 1,80,000
Wages 1,70,000
Carriage 6,000
Cartage 1,000
Sundry Expenses 3,000
The work was certified for Rs. 3,75,000 and 80 % of this was paid as agreed.
In 1980, the amount expended were :
Rs.
Materials 2,20,000
Wages 2,30,000
Carriage 23,000
Cartage 2,000
Sundry Expenses 4,000
3/4 of the contract was certified as done by 31st December and 80 % of this was
th

received accordingly. The cost of uncertified work ascertained at Rs. 20,000.

In 1981, the amount expended was :
Rs.
Materials 1,26,000
Wages 1,70,000
Cartage 6,000
Sundry Expenses 3,000
On 30th June 1981, the whole contract was completed. Prepare Contract Account and
Contractee’s Account in the books of the Contractor.

17. The following information is extracted from the books of a contractor :

Rs.
Contract Price 5,00,000
Material sent to site 1,26,000
Direct labour paid 88,000
Overhead expenses allocated 46,000
Plant sent to site 60,000
Depreciation on plant on straight line method 20 %
Material at close at site 6,000
Work certified 4,00,000
It is estimated that contract will be completed in 6 months. The additional costs
required for completion of contract are as follows :
 Rs.
Materials 40,000
Labour 24,000
Overheads 10,000
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Contingency reserve is to be created at 5 % on cost before creating reserve. Prepare

Contract Account showing calculation of estimated costs, profits and profit transferred to
P & L A/c.

18. An expenditure of Rs. 1,60,000 has been incurred on a contract to the end of 31-3-
1986. The value of work done and certified is Rs. 2,25,000. The cost of work done but
not yet certified is Rs. 8,000. It is estimated that the contract will be completed by 30th
June 1986 and an additional expenditure of Rs. 35,000 will have to be incurred to
complete the contract. The total estimated expenditure on the contract is to include a
provision of 2.5 % for contingencies. The contract price is Rs. 2,50,000 and Rs.
2,20,000 has been realized in cash up to 31st March 1986. Calculate the proportion of
profit to be taken to P & L A/c as on 31st March 1986.

19. The following is the Trial Balance of Premier Construction Company, engaged in the
execution of Contract No. 747 for the year ended 31st December 1978.

Rs. Rs.
Contractee’s Account -- Amount received 3,00,000
Building 1,60,000
Creditors 72,000
Bank balance 35,000
Capital A/c 5,00,000
Materials 2,00,000
Wages 1,80,000
Expenses 47,000
Plant 2,50,000
8,72,000 8,72,000

The work on contract 747 was commenced on 1st January 1978. Material costing Rs.
1,70,000 was sent to site of the contract, but those of Rs. 6,000 were destroyed in an
accident. Wages of Rs. 1,80,000 were paid during the year. Plant costing Rs. 50,000
was used on the contract all through the year. Plant with a cost of Rs. 2,00,000 was
used from 1st January to 30th September and was then returned to the stores. Materials
of the cost of Rs. 4,000 were at site on 31st December 1978.

The contract was for Rs. 6,00,000. Work certified was 80 % of the total contract work
at the end of 1978. Uncertified work was estimated at Rs. 15,000 on 31st December
1978. Expenses are charged to the contract at 25 % of wages. Plant was to be
depreciated at 10 % p.a., for the entire year. Prepare Contract No. 747 Account for
 the year 1978 and make out the Balance Sheet as at 31st December 1978 in the books
of Premier Construction Company.

20. You are required to prepare the contract account for the year ended 31st December
1989 from the following particulars :
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Rs.
Materials 4,00,000
Wages 5,00,000
Expenses 1,00,000
Expenses accrued due 20,000
Plant 2,00,000
Work certified (90 % received in cash) 16,00,000
Materials at site on 31-12-1989 40,000
Depreciate plant by 10 %

10 % of the value of materials issued and 5 % of wages may be taken to have been
incurred for the portion of the work completed, but not yet certified. Expenses to be
charged as a percentage of direct wages. Ignore depreciation on uncertified portion of
the work. Ascertain the amount to be transferred to profit and loss account. The value of
the contract is Rs. 20,00,000.

21. The following is the summary of the entries in a contract ledger as on 31st March 1985
in respect of a contract. Prepare relevant accounts from the above information.
Rs.
Materials purchased directly 45,000
Materials drawn from stores 7,000
Wages 18,000
Direct Expenses 7,000
Establishment expenses 8,000
Plant 34,000
Scrap sold 1,800
Cost of sub-contract 7,500

You are supplied the following additional information :

(a) Expenses due on the last date : wages Rs. 900; direct expenses Rs. 1,200.
(b) Included in the above summary of entries are wages Rs. 1,000 and other
expenses Rs. 1,500 since certification. The value of materials used since
certification is Rs. 2,200.
(c) Depreciation on the plant Rs. 8,600.
(d) Materials on hand Rs. 10,000.
(e) The total contract price is Rs. 1,00,000.
(f) Rs. 62,500 had been certified up to 31st March 1985 when 5/8th contract had
been completed.

22. The following is a summary of the expenditure on Job No. 31 to December 31st 1989.
 Rs.
Direct Wages 6,900
Direct Materials 34,000
Stores issued 3,800
Stores returned 550
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Sub-contract costs 6,300

Plant 12,000

You obtain the following information :

(a) The job was begun during 1989 and the total contract price is Rs. 60,000.
(b) The architects had certified that four-fifths of the contract had been completed at
December 15th.
(c) Depreciation of plant up to December 15th is Rs. 4,800.
(d) The summary set out above includes items relating to the period since December
15th is as follows :
Rs.
Wages 700
Materials used 1,620
Plant 280
(e) st
Materials on site at December 31 had cost Rs. 5,000 and stores on site had
cost Rs. 400.
(f) Establishment charges are 40 % on direct wages.
(g) A fine of Rs. 1,000 is likely to be imposed for late completion.

You are required in respect of Job No. 31 :

* to prepare a Job Ledger Account.
** to show what profit or loss has arisen on the work certified and
*** to suggest what figures should be taken to the P & L A/c for the year to
December 31st 1989.