Contract costing is a system of job costing that is applied to relatively large cost units, which normally take a considerable length of time to complete. Building and construc¬tion work, civil engineering and shipbuilding are some examples of industries where large contract work is undertaken, and where contract costing is appropriate.
Contract Costing deals with the books of the Contractor only, i.e. the cost of the work and measuring the profit or loss on the contract. Contract costing is governed by IAS 11. Features of long term contracts
1.By contract costing situations, we tend to mean long term and large contracts: such as civil engineering contracts for building houses, roads, bridges and so on. We could also include contracts for building ships, and for providing goods and services under a long term contractual agreement.
2.With contract costing, every contract and each development will be accounted for separately; and does, in many respects, contain the features of a job costing situation.
3.Work is frequently site based and takes a long time to complete & may spread over two or more of the contractor's accounting years.
-Contract Profit and Loss Account
-Contractee Account (e.g. Government of Jamaica)
-Balance Sheet Extract
A separate account will be kept for each contract with the general objective of estab¬lishing the overall contract profit or loss. To do this the following entries are required: Contract Account
Typical Debit EntriesTypical credit entries
Direct costs (Material, Labour)Credit Plant, Materials transferred from Contract Direct expenses (Plant hire, Sub-
contractors. Architects' fees, etc.)Material, plant c/d
Cost of Plant boughtCost of work certified (cost of sales)
Debit any materials, plant etc, transferred to contractCost of work not certified (WIP c/d value of contract) Debit Head Office Charges
In addition there are, of course, contra entries within the contract account relating to carry forward/brought forward items, accruals and prepayments.
A feature of most contract work is the amount of plant used. This includes cranes, trucks, excavators, mixers and lorries. The usual ways in which plant costs are dealt with are as follows:-
(a) When plant is leased –The leasing charges are charged directly to the contract.
(b)When plant is purchased. There are two methods in common use.
i.Charge new plant at cost to the contract for which it was purchased. When the plant is no longer required and is transferred to another contract or base, the original contract would be credited with the second hand value (NBV @ date of plant transfer). In this way the contract bears the charge for the depreciation incurred. Another option would be to just charge the depreciation for the period to the contract account (debit entry).
ii.Where plant is moved frequently from contract to contract or where contracts are relatively short, a “Plant Service Department” is created. This department organises the transfer of plant from contract to contract as required and each contract is charged a daily or weekly rental.
Note: Whatever method is used for charging the capital costs of plant, the ordinary running costs, fuel, repairs and insurance would be charged directly to the contract.
A construction company is currently undertaking three separate contracts and information relating to these contracts for the previous year, together with other relevant data, are shown below:
Balances b/fwd at beginning of year:
Material on site
Written-down value of plant and machinery—77374 Wages accrued510
Transactions during previous year:
Profit previously transferred to...