T.Y.BBA.

SEMESTER VI (2016-17)
FACULTY OF COMMERCE
THE M.S.UNIVERSITY OF BARODA
SUBJECT : SERVICE MANAGEMENT AND ACCOUNTING
UNIT-III: 2. ACCOUNTING FOR REAL ESTATE DEVELOPERS Part- II
Note : The study material is not exhaustive. The questions are given to save time in
dictation. Students are required to refer reference books.

Contract Costing
Contract: Contract refers to a large job/assignment/work order, where the execution of work
is spread over two or more financial years. Generally, a contract commences in one financial
year, but end in a different year.

Contract Costing: Contract or Terminal costing involves ascertainment of costs of contract.

It is an extension of principles of job costing for long term projects like civil construction,
ship building, Interior decoration, etc

Distinguish between Job costing and Contract costing:

Job costing Contract Costing
1 Job refers to any specific assignment, Contract refers to a large job /
contract or work order wherein work is assignment /work order. The execution of
execute as per customers requirement work is spread over two or more financial
years

2 Job costing is applied in printing press; Contract costing is applied in activities like
furniture works, interior decoration and civil construction, ship Building, etc.
other similar work.

Distinguish between Work certified and Work uncertified.

Work certified Work uncertified
1. It represents work done during the period, It represents work done during the period
and also certified by the architect but not yet certified by the architect /
/surveyor. surveyor
2. The amount of work certified is based on Cost of work certified is based on the
Architects certificates contractors own estimate.
3. It includes profit element, since it is It is a conservative cost estimate and does
based on contract price not include any profit element.
4. It is considered for calculating percentage It is not considered in calculation of
of completion. percentage of completion.
5. It provides the basis for claiming It arises due to time gap between the dates
periodical process payments from the of previous certificate to the financial year.
contractee.
What is meant by notional profit?
1. Actual profit on a contract can be ascertained only after it is entirely completed.
However for recognition of profits during the course of contract, the concept of
notional profit is used.

2. Notional profit is the excess of income till date over expenditure till date on a
contract.

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3. Notional profit can be ascertained as under-

Notional Profit = Income till date (Value of work certified + cost of work uncertified)
Less Expenditure till date (Total costs on contract, after adjusting materials at site,
WDV of plant at site, prepaid/accrued expenses, etc.)

Principles for Recognition of Profit on Incomplete Contract:

% of Up to 26 to 50% 51 to 90% 91 to 99% 100%

Completion 25%
Profit to be Nil 1/3rd of NP 2/3rd of NP Profit is NP(CR/WC)
transferred to (CR/WC) (CR/WC) recognised
Profit & Loss on the basis
Account of estimated
total profit

% of Completion = WC/CP

Contract Account

Contract No for the year ended..

Particulars Rs. Particulars Rs.

To Materials (Issued) By Work in progress:
To Wages (Paid + Payable) - Work certified
To Direct Expenses - Work uncertified
To Indirect Expenses By Balances c/d:
To Sub-Contract costs - Materials at site
To Cost of extra work - Plant (WDV) at site
To Plant ( at cost)
To Notional Profit balancing figure
Total Total
To Profit and Loss a/c transfer of By Notional profit b/d
profits recognised during the period
To Reserve profit balancing figure
Total Total
To Work in progress b/d By reserve profit b/d
To Balances b/d
- Materials at site
- Plant at site

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Example 1: Profit on completed contract basics
The following details relate to a contract that took exactly one year for completion
Materials issued Rs. 58,000

Direct Expenses Rs. 12,000

Direct wages Rs. 75,000

Establishment charges Rs. 8,000

Cost of special plan (Deprn 20%) Rs. 30,000

Material returned to stores Rs. 5,000

The contract price was Rs. 175000 and was fully received at end of the year. Prepare the
contract account.

Example 2: Profit recognition with notional profit

The following details are available from the books of account of a contractor with respect to a
particular construction work for the year ended 31 March-

Particulars Rs. Particulars Rs.

Contract price 91,00,00 Material returned to store 14,840
0
Cash received from contractee (90% 71,91,00 Head office expenses 2,50,000
of work certified) 0 apportioned
Material sent to site 35,82,60 Cost of work uncertified 3,17,000
0
Planning and estimation cost 3,50,000 On 31 March:
Material at site 85,400
Accrued direct wages 78,120
Accrued direct expenses 9,310
Value of plant (as 6,16,000
revalued)
Direct wages paid 32,62,70
0
Cost of plant installed at site 7,00,000
Direct expenses 1,68,000
Establishment expenses 2,03,000

You are required to prepare the contract account for the year ended 31 March.

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 Contract costing

Solution 1

Contract a/c for the year ended 31 December

Particulars Rs. Particulars Rs.

To Materials (issued Rs. 5300 By Contractees a/c 17500
58000-returns Rs. 5000) 0 (contract completed) 0
To Wages (given)
To Direct charges (given) 7500
To Establishment charges 0
(given) 1200
To Depreciation on Plant 0
(20% of Rs. 30000) 8000
To P/L a/c Profit 6000
transferred (bal. fig.)
2100
0
total 1750 total 17500
00 0

Solution 2

Contract a/c for the year ended 31 March

Particulars Rs. Particulars Rs.

To Materials 35826 By Work in progress a/c
To Direct Wages Paid 00 - Work certified 79900
3262700 (7191000/90%) 00
Add: Payable 33408 - Work uncertified 31700
78120 20 By Materials returned to 0
To Direct Expenses Paid stores 14840
168000 17731 By Materials at site 85400
Add: Payable 0 By WDV of plat at site 61600
9310 35000 0
To Planning and estimation 0
To Cost a plant installed at 70000
site 0
To Establishment Expenses 20300
To HO Expenses 0
Apportioned 25000
To Notional profit Bal. fig. 0
41951
0
Total 90232 Total 90232
40 40
To P/L a/c Profit Transfer 25170 By Notional profit b/d 41951
(See Note B) 6 0
To Reserve profit c/d Bal. 16780
fig. 4
total 41951 total 41951
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 0 0
To work in progress b/d 83070 By reserve profit b/d 16780
(WC+WUC) 00 4
To WDV of plant at site b/d 61600
To Material at site b/d 0
85400

Notes:

A) % of Completion = WC/contract price = 7990000/9100000 =

87.80%

B) So, Profit Transferred To P&L a/c = 2/3*notional profit*(cash

received /WC) = 2/3*419510*(7191800/7990000) = 251706.