12.

33 CONTRACT COSTING By: CA Ashish Kalra

SELF ASSESSMENT PROBLEMS

PREPARATION OF CONTRACT ACCOUNT

Q1: The following was the expenditure on a contract for `12,00,000 commenced in January.
Materials `2,40,000; Wages `3,28,000; Plant `40,000; Overhead `17,200.
Cash received on account of the contract up to 31st December was `4,80,000 being 80% of the work certified. The
value of materials in hand was `20,000. The plant had undergone 20% depreciation. Prepare contract account.
[Ans: Profit Credited to P & L A/c `14,293]

PREPARATION OF CONTRACT ACCOUNT AND EXTRACT OF BALANCE SHEET

Q2: Pioneer Construction Company Ltd. obtained a contract for the erection of a multi-storey building. Building
operations started in July. The contract price was `9,00,000. On 30th June, the end of the financial year, the cash
received on account was `3,60,000, being 80% of the amount on the surveyor's certificate. The following additional
information is given:
Particulars Amount in (`)
Materials Issued to contract 1,80,000
Materials on Hand at Site as on 30th June 7,500
Wages 2,46,600
Plant purchased specially for contract and to be depreciated at 10% per annum 30,000
Direct expenses incurred 12,900
General Overhead allocated to Contract 7,600
Work Finished but not yet Certified at Cost 15,000
You are required to prepare the contract account and statement showing the profit on the contract to 30th June
indicating what proportion of the profit the company would be justified in taking to the credit of the profit and loss
account. Show what entries in respect of the contract would appear in the balance sheet.
[Ans: Profit credited to P & L A/c `11,946]
 Q3: From the following information prepare Contract Account in tabular form.
Contracts A B C
Commencement 1.1.95 (`) 1.7.95 (`) 1.10.95 (`)
Contract Price 80,000 54,000 60,000
Raw Material 14,400 11,600 4,000
Wages paid 22,000 22,400 2,800
General Charges 800 560 200
Plant Installed 4,000 3,200 2,400
Materials on Hand at end 800 800 400
Wages Accrued 800 800 360
Work Certified 40,000 32,000 7,200
Work Uncertified 1,200 1,600 420
Cash Received against Work Certified 30,000 24,000 5,400
Depreciation is to be charged on the plant @ 10% p.a. which was installed on the opening date of contract in each case.
[Ans: Profit Credited to P & L A/c Contract A 1,800; Contact B (Loss) – `1,120; Contract C Nil]

MULTIPLE CONTRACTS
Q4: The following details have been extracted from the books of DKG Construction LLP, which closes its books
on 31st March every year.
Contract 101 Contract 102
Date of commencement 1st April, 2015 1st December, 2015
st
Expected date of completion 30 September, 2016 31st December, 2016
Amount (`000) Amount (`000)
Contract price 4,000 1,100
Materials issued to construction site 1,400 300
Material returned to store 160 60
Plant & Machinery sent to construction site 2,000 300

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Inter-contract materials transfer (80) 80
Materials at site on 31st March, 2016 150 30
Plant hire charges 400 60
Wages paid to workers 600 540
Overhead apportioned 150 36
Other direct expenses 50 8
Value of work certified 3,000 750
Cost of work not certified 320 40
Progress payment received from contractees 2,880 700
Estimated cost of completion 270 220
Depreciation is charged on plant and machinery @ 15% p.a. using straight line method.
Required: Prepare contract account for each contract using columnar format, showing Cost of work certified and
Notional profit/loss on each contract.
[Ans. Cost of work certified: Contract 101 = `21,90,000; Contract 102 = `9,09,000
Notional Profit: Contract 101 = `8,10,000; ` (1,59,000)]
 Q5: The following particulars are obtained from the books of Vinak Construction Ltd. as on 31,3.1983:
Plant and Equipment at Cost : `4,90,000
Vehicles at Cost : `2,00,000
Details of contract which remain uncompleted as on 31.3.83: (` in lakhs)
Contract Nos.
Particulars
V. 20 V. 24 V. 25
Estimate Final Sales Value 8.00 5.60 16.00
Estimated Final Cost 6.40 7.00 12.00
Wages 2.40 2.00 1.20
Materials 1.00 1.10 0.44
Overheads (Excluding Depreciation) 1.44 1.46 0.58
Total Costs to Date 4.84 4.56 2.22
Value Certified by Architects 7.20 4.20 2.40
Progress Payments Received 5.00 3.20 2.00
Depreciation of Plant and Equipment and Vehicle should be charged at 20% to the three contracts in proportion to
work certified. You are required to prepare statements showing contract-wise and total:
(i) Profit/Loss to be taken to the P & L A/c for the year ended 31st March, 1983.
(ii) Work-in-progress as would appear in the Balance Sheet as at 31st March, 1983. (Past Exam Question)
[Ans: (i) V.20 = `1.00 Lakh; V.24 = `1.40 Lakh; V.25 = `0.06 Lakh;
(ii) V.20 = `1.56 Lakh; V.24 = `0.38 Lakh; V.25 = `0.40 Lakh]
MISSING FIGURES
Q6: Premier Construction Company undertook a contract for `5,00,000 on 1st August, 2016. On 31st March, 2017
when the accounts were closed, the following information was available:
Cost of work uncertified : `1,20,000
Cash received : `2,50,000 (80% of work certified)
Profit transferred to Costing Profit : `80,000
and Loss account at the end of the year on
Incomplete contract
Calculate:
(i) The value of work in progress certified
(ii) Degree of completion of contract
(iii) Notional Profit and
(iv) Cost of contract as on 31-03-2017 (Past Exam Question)
[Ans: (i) `3,12,500 (ii) 62.5% (iii) `1,50,000 (iv) `2,82,500]

PREPARATION OF CONTRACT ACCOUNT, CONRACTEE ACCOUNT & VALUATION OF

WORK CERTIFIED & UNCERTIFIED
 Q7: A contractor prepares his accounts for the year ending 31st December each year; He commenced a
contract on 1st April 1998. The following information relates to the contract as on 31st December, 1998:

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12.35 CONTRACT COSTING By: CA Ashish Kalra

Particulars Amount in (`)

Material issued 2,51,000
Labour charges 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, 1998.
The contract price is `20,00,000. On 31st December, 1998 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 how much profit or loss should be included in financial accounts to 31st December.
1998. (Study Material-Adapted)
[Ans: Profit Credited to P & L A/c `1,06,625]
Q8: M/s Kishore and Company commenced the work on a particular contract on 1st April 1999. They close their books
of accounts for the year on 31st December each year. The following information is available from their costing
records on 31st December, 1999:
Material sent to site `50,000; Foreman's salary `12,000; Wages paid `1,00,000.
A machine costing `32,000 remained in use on site for 1/5 of the year. Its working life was estimated at 5 years and
scrap value at `2,000. A supervisor is paid `2,000 per month and had devoted one-half of his time on the contract.
All other expenses were `15,000. The materials on site were was `9,000. The contract price was `4,00,000. On 31st
December, 1999, 2/3 of the contract was completed; However, the architect gave certificate only for `2,00,000 on
which 75% was paid.
Prepare the Contract Account.
[Ans: Profit credited to P & L A/c `33,175]
PREPARATION OF CONTRACT ACCOUNT FROM FIRST YEAR TO LAST YEAR
 Q9: The following information relates to building contract for `10,00,000 for which 80% of the value of work-
in-progress as certified by the architect is being paid by the contractee:
Particulars I year II year III year
Materials Issued `1,20,000 `1,45,000 `84,000
Direct Wages 1,10,000 1,55,000 1,10,000
Direct Expenses 5,000 17,000 6,000
Indirect Expenses 2,000 2,600 500
Work Certified 2,35,000 7,50,000 10,00,000
Uncertified Work 2,800 8,000
Plant Issued 14,000 Nil
Materials at Site 2,000 5,000 8,000
The value of the plant at the end of I, II and III years was `11,200, `7,000 and `3,000 respectively.
Prepare contract account for these three years, taking into account such profit as you think proper on incomplete
contract.
[Ans: Profit Credited to P & L A/c Year I = Nil; Year II = `106,347; Year III = `1,33,553]
PREPARATION OF CONTRACT A/C & CONTRACTEE A/C
Q10: Z Limited obtained a Contract No. 999 for `50 lakhs. The following details are available in respect of this
contract for the year ended March 31, 2014:
Amount in (`)
Materials purchased 1,60,000
Materials issued from stores 5,00,000
Wages and salaries paid 7,00,000
Drawing and maps 60,000
Sundry expenses 15,000
Electricity charges 25,000
Plant hire expenses 60,000
Sub-contract cost 20,000
Materials returned to stores 30,000
Materials returned to suppliers 20,000

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 CONTRACT COSTING By: CA Ashish Kalra
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The following balances relating to the contract No. 999 for the year ended on March 31, 2013 and March 31, 2014
are available:
As on 31st March, 2013 As on 31st March, 2014
Particulars
Amount in (`) Amount in (`)
Work certified 12,00,000 35,00,000
Work uncertified 20,000 40,000
Materials at site 15,000 30,000
Wages outstanding 10,000 20,000
The contractor receives 75% of work certified in cash.
Prepare Contract Account and Contractee’s Account. (Past Exam Question)
[Ans: Profit credited to P & L A/c `4,17,500]

DETERMINATION OF PERCENTAGE OF WORK CERTIFIED & AMOUNT TO BE

CREDITED TO P&L A/C
 Q11: Paramount Engineers are engaged in construction and erection of a bridge under a long-term contract.
The cost incurred upto 31.03.2001 was as under:
Fabrication: (`) in Lakhs
Direct Materials 280
Direct Labour 100
Overheads 60
440
Erection Costs to date 110
550
The contract price is `11 crores and the cash received on account till 31.03.2001 was `6 crores.
A technical estimate of the contract indicates the following degree of completion of work: Fabrication – Direct
Material – 70%, Direct Labour and Overheads 60%, Erection – 40%.
You are required to estimate the profit that could be taken to Profit and Loss Account against this partly
completed contract as at 31.03.2001. (Past Exam Question)
[Ans: Profit credited to P & L A/c `57.576 Lakh]

RECOGNITION OF PROFIT BY VARIOUS METHODS IN CASE OF

A CONTRACT NEARING COMPLETION
Q12: 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 Profit & Loss Account under various methods and give
your recommendation.
Particulars Amount in (`)
Total Expenditure to date 4,50,000
Estimated further expenditure to complete 25,000
the contract (including contingencies)
Contract Price 6,12,000
Work Certified 5,50,800
Work Uncertified 34,000
Cash Received 4,40,640
(Study Material-Adapted)
[Ans: Notional Profit = `1,34,800; Estimated Profit = `1,37,000;
Conservative Estimate of Profit = `98,640]

PREPARATION OF CONTRACT ACCOUNT & RECOGNITION OF PROFIT

IN CASE OF A CONTRACT NEARING COMPLETION
Q13: A contractor commenced a building contract on October, 1, 1997. The contract price is `4,40,000. The
following data pertaining to the contract for the year 1998-99 has been compiled from his books and is as under:
Particulars Amount in (`)
April 1, 1998 Work-in-Progress not Certified 55,000
Materials at Site 2,000

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12.37 CONTRACT COSTING By: CA Ashish Kalra

1998 - 99 Expenses Incurred:

Materials Issued 1,12,000
Wages Paid 1,08,000
Hire of plant 20,000
Other expenses 34,000
March 31, 1999 Materials at site 4,000
Work-in-progress: Not certified 8,000
Work-in-progress: Certified 4,05,000
The cash received represents 80% of work certified. It has been estimated that further costs to complete the
contract will be `23.000 including the materials at site as on March 31, 1999.
Required: Determine the profit on the contract for the year 1998-99 on prudent basis, which has to be credited to
P/L A/c. (Past Exam Question)
[Ans: `66,273]

PREPARATION OF CONTRACT A/C AND RECOGNITION OF PROFIT TO BE TAKEN

TO THE CREDIT OF P&L A/C ON THE BASIS ESTIMATED PROFITS
 Q14: Rex limited commenced a contract on 1.7.1988. The total contract price was `5,00,000 but Rex Limited
accepted the same for `4,50,000. It was decided to estimate the total profit and take to the credit of Profit & Loss
Account that proportion of estimated profit on cash basis which the work completed bore to the total contract price.
Actual expenditure till 31-12-1988 and estimated expenditure in 1989 are given below:
Particulars Actual till 31.12.1988 (`) Estimates for 1989 (`)
Materials 75,000 1,30,000
Labour 55,000 60,000
Plant purchased (at Original Cost) 40,000
Miscellaneous Expenses 20,000 35,500
Plant Returned to Stores (at Original Cost) On 31.12.1988: 10,000 On 30-9-1989: 25,000
Materials at Site 5,000 Nil
Work Certified 2,00,000 Full
Work Uncertified 7,500 Nil
Cash Received 1,80,000 Full
The plant is subject to annual depreciation @ 20% of original cost. The contract is likely to be completed on 30.9.89.
You are required to prepare the Contract account for the year ended 31.12.88. Working should be clearly given. It is
the policy of the company to charge depreciation on time-basis. (Past Exam Question)
[Ans: Profit transferred to P & L A/c `26,400]
Q15: PVK Constructions commenced a contract on 1st April, 2014. Total contract value was `100 lakhs. The
contract is expected to be completed by 31st December, 2016. Actual expending during the period 1st April, 2014 to
31st March, 2015 and estimated expenditure for the period 1st April, 2015 to 31st December, 2016 are as follows:
Actual (`) Estimated (`)
Particulars st st
1 April, 2014 to 31 March,
1st April, 2015 to 31st Dec, 2016
2015
Material issued 15,30,000 21,00,000
Direct Wages paid 10,12,500 12,25,000
Direct Wages outstanding 80,000 1,15,000
Plant purchased 7,50,000 -
Expenses paid 3,25,000 5,40,000
Prepaid Expenses 68,000 -
Site Office Expenses 3,00,000 -
Part of the material procured for the contract was unsuitable and was sold for `2,40,000 (cost being `2,55,000) and
a part of plant was scrapped and disposed of for `80,000 at cost. The value of plant at site on 31st March, 2015 was
`2,50,000 and the value of material at site was `73,000. Cash received on account to date was `36,00,000,
representing 80% of the work certified. The cost of work uncertified was valued at `5,40,000.
Estimated further expenditure for completion of contract is as follows:
 An additional amount of `4,62,500 would have to be spent on the plant and the residual value of plant on the
completion of the contract would be `67,500.
 Site office expenses would be the same amount per month as charged in the previous year.

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 CONTRACT COSTING By: CA Ashish Kalra
12.38
 An amount of `1,57,500 would have to be incurred towards consultancy charges.
Required: Prepare Contract Account and calculate estimated total profit on this contract & take to the credit of
that proportion of estimated profits on cash basis which the work completed and certified bears to the Contract
Price. Also show the extract of Balance Sheet in relation to the contract as on 31/03/2015. (Past Exam Question)
[Ans: Estimated Profit = `13,60,000; Profit transferred to P & L A/c `4,89,600]

CALCULATION OF ESCALATION CLAIM

 Q16: A contractor has entered into a long term contract at an agreed price of `1,75,000 subject to an escalation
clause for materials and wages as spent out in the contract and corresponding actuals are as follows:
Standard Actual
Materials Qty (Tonnes) Rate (`) Qty (Tonnes) Rate (`)
A 5,000 5.00 5,050 4.80
B 3,500 8.00 3,450 7.90
C 2,500 6.00 2,600 6.60
Labour Hours Hourly Rate (`) Hours Hourly Rate (`)
X 2,000 7.00 2,100 7.20
Y 2,500 7.50 2,450 7.50
Z 3,000 6.50 3,100 6.60
Reckoning the full actual consumption of material and wages the company has claimed a final price of `1,77,360. Give
your analysis of admissible escalation claim and indicate the final price payable.
(Study Material-Adapted)
[Ans: Escalation Claim `850; Final Price `1,75,850]

PREPARATION OF CONTRACT A/C & ACCOUNTING OF ESCALATION CLAUSE

 Q17: Deluxe Limited undertook a contract for `5,00,000 on 1st July 1986. On 30th June 1987, when the accounts
were closed, the following details about the contract were gathered:
Particulars Amount in (`) Particulars Amount in (`)
Materials Purchased 1,00,000 Wages Accrued 30.6.1987 5,000
Wages Paid 45,000 Work Certified 2,00,000
General Expenses 10,000 Work Uncertified 15,000
Plant Purchased 50,000 Cash Received 1,50,000
Materials on Hand 30.6.1987 25,000 Depreciation of Plant 5,000
The above contract contained an escalation clause which reads as follows: “In the event of prices of materials and
rates of wages increase by more than 5% the contract price will be increased accordingly by 25% of the rise in the
cost of materials and wages beyond 5% in each case.”
It was found that since the date of signing the agreement the prices of materials and wage rates increased by 25%. The
value of work certified does not take into account the effect of the above clause. Prepare the contract account.
Workings should be shown as part the answer. (Past Exam Question)
[Ans: Contract Escalation Claim = `5,000; Profit to be credited to P&L A/c = `20,000]

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