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Contract Costing
2.2.1 Material

Contracts are generally carried out at sites away from the head office of the Contractor. So, the
material required for the Contract may be issued from the Stores or may be directly bought at the
site.
(1) Material issued / Bought: The cost of the materials, issued by the stores or bought directly
at site, is debited to the Contract Account.
(2) Material Supplied by Contractee : If any material is supplied by the COntractee (e.g. cement in
construction Contract), it is not debited to the Contract Account. A separate Memorandum
Account is maintained in respect of such material.
(3) Material Transferred : If any material is transferred from one Contract to another, the
Contract Account which receives the material is debited and the Contract Account which
transfers the material is credited with the cost of the material so transferred.
(4) Material Returned to Store / Suppliers : If any material is returned to the Stores or to the
Suppliers, the Contract Account is credited with the cost of material so returned.
(5) Material Lost/Destroyed : The material lost or destroyed by theft, fire, accident etc. is an
Abnormal Loss. Just like an abnormal loss in a process account, the value of such Abnormal
Loss is isolated and not allowed to affect the Cost of the Contract. The cost of material lost or
destroyed is debited to the Costing Profit and Loss Account and credited to the Contract
Account.
(6) Sale of Material : Sometimes, the surplus material or scrap etc. may be sold at a profit of
loss. Such profit or loss is treated as an abnormal item and not allowed to affect the Cost
of the Contract. Hence, the profit or loss on sale of material is directly transferred to the
Costing Profit and Loss Account. Only the cost of the materials sold is credited to the
Contract Account.
(7) Material At Site: If some stock is lying at site, on completion of the Contract (or, at end of
accounting year) the cost of such Closing Stock is credited to the Contract Account.
Thus, in effect, finally the Contract Account is charged with the Net Cost of the Materials used for
the Contract. The Net Cost of Materials is ascertained as shown in the following worksheet:

WORKSHEET 1 : COST OF MATERIAL IN A CONTRACT

Particulars
Cost of Material Issued From Stores or
Bought At Site

Add : Cost of Material Received From Another Contract

Less : Cost of Material Transferred to Another Contract .

xx

Cost of Material Returned to Store / Suppliers

xx

Cost of Material Lost / Destroyed

xx

Cost of Material Sold

xx

Cost of Material in Closing Stock / At Site

xx

= Net Cost of Material Debited to Contract Account

2.2.2 Labour

As the work is performed at the site itself, the payments made to all persons working at the site are
directly debited to the Contract Account. This would include the wages paid to the workers, the
salary paid to the supervisors and also the remuneration paid to the Engineers etc. who are directly
and solely occupied with the Contract.
2.2.3 Direct Expenses
The expenses directly relating to the Contract are debited to the Contract concerned. For example, in
a Contract for construction ofa Building, fees paid to an Architect for preparing the plan and design
of the building, or the payments made to Sub-Contractors for electrical fittings, erection of Lifts in
the Building, sanitary fittings etc. form a direct expenditure and are debited to that particular Contract.