Advance Cost and Management Accounting
Unit 2 – Contract Costing
Lecture Sheet
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. Accounting Considerations
- Contract Account
- Contract Profit and Loss Account
- Contractee Account (e.g. Government of Jamaica)
- Balance Sheet Extract
Contract Account
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 Entries Typical 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 bought Cost of work certified (cost of sales)
Debit any materials, plant etc, transferred to contract Cost of work not certified (WIP c/d value of contract)
Lecture Sheet
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. Accounting Considerations
- Contract Account
- Contract Profit and Loss Account
- Contractee Account (e.g. Government of Jamaica)
- Balance Sheet Extract
Contract Account
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 Entries Typical 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 bought Cost of work certified (cost of sales)
Debit any materials, plant etc, transferred to contract Cost of work not certified (WIP c/d value of contract)