Chapter 4 CONTRACT COSTING


Q1. A firm of builders, carrying out large contracts, kept in a contract ledger, separate accounts for each contract. On 30th June, 2009 the following was shown as being the expenditure in connection with Contract No. 777.
Particulars

Rupees

Materials Purchased
58,063
Materials from stores
9,785
Plant which had been used on other contracts
12,523
Additional Plant purchased
3,610
Wages
73,634
Direct Expenses
2,026
Proportion of establishment charges
8,720
The contract, which had commenced on 1st January, 2009 was for Rs 3,00,000 and the amount certified by the architect, after deduction of 20 percent retention money was Rs 1,20,800, the work being certified to 30th June, 2009. The materials on the site at that date was valued at Rs 9,858. A contract plant ledger was also kept, in which depreciation was dealt with monthly, the amount debited in respect of plant on Contract 777 to 30th June, 2009 was Rs 1,130.
You are requested to prepare an account showing the profit on the contract to 30th June, 2009.

Q2. M/s Gem Builders, having undertaken a contract at a price of Rs 3,00,000 started the work on 1st January, 2008. Prepare Contract Account for the year ended on 31st December, 2008 from the following particulars:
Particulars

Rupees

Materials
85,624
Plant installed at site
15,000
Labour
74,375
Sundry Direct Expenses
3,293
Materials at site on 31st December, 2008
1,883
Materials returned to stores
549
Cash received (90% of work certified)
1,80,000
Work uncertified
4,500
Establishment charges allocated to contract
4,000
Wages due on 31.12.2008
2,640
Value of Plant at site on 31.12.2008
11,000
Show your calculation of the amount of profit to be transferred to Profit & Loss Account and explain the basis of your calculation.

Q3. Pallavi Construction Ltd. engaged on two contracts A and B. From their books of account the following particulars are obtained in respect of the year 2008:

Particulars

Contract A

Contract B

Contract Price

18,00,000

15,00,000

Materials Purchased

4,80,000

1,80,000

Wages Paid

4,20,000

1,05,000

Materials returned
12,000
6,000
Direct Expenses

1,80,000

90,000

Establishment charges

81,000
24,000

Plant installed

2,40,000
2,10,000
Accrued wages upto 31st December, 2008
48,000
36,000
Materials on site on 31st December, 2008
66,000
24,000
Work Certified
12,60,000
4,05,000
Cash Received
11,34,000
3,75,000
Plant valued on 31st December, 2008
1,95,000
     1,92,000
Uncertified Work
69,000
30,000
On 25th September, 2008, materials costing Rs 27,000 have been transferred to Contract B from Contract A. You are required to show:
a.     Contract Account
b.     Contractee’s Account
c.     Balance Sheet presentations of Contract items

Q4. Jim commenced business as Builder and invested Rs 5,00,000 in capital equipment. He undertook contract for Rs 1,00,00,000 to be completed in three years. He was paid 90% of the value of work certified by the architect immediately and balance was to be paid on completion of the contract. The Architect’s certificates were for Rs 30,00,000 during the first year, Rs 50,00,000 during the second year and Rs 20,00,000 in the third year respectively.
Jim was duly paid in accordance with the terms of contract and his capital equipments were valued at the end at Rs 3,80,000 on which depreciation was calculated on straight-line method in two years at 8%. The records showed the following:

Year 1

Year 2

Year 3

Particulars

Rupees

Rupees

Rupees

Materials

12,70,000

25,00,000

5,00,000

Wages

15,00,000

20,00,000

8,00,000

Carriage

60,000

1,50,000

1,50,000

Miscellaneous Expenses
30,000
20,000
8,000
Incomplete work at the end

4,00,000

4,00,000
Nil

Stock transferred to stores at the end

Nil
Nil
50,000
You are required to prepare Contract Account in the books for three years. Also show Contractee’s Account.

Q5. The following information relates to building contract for Rs 10,00,000.

Particulars

2007

2008

 

Rupees

Rupees

Materials issued

3,00,000

84,000

Direct Wages

2,30,000

1,05,000

Direct Expenses
22,000
10,000
Indirect Expenses

6,000

1,400

Work Certified

7,50,000
10,00,000

Work Uncertified

8,000

Materials at site
5,000
7,000
Plant issued
14,000
2,000

Cash received from contractee

6,00,000
10,00,000
The values of plant at the end of 2007 and 2008 were Rs 7,000 and Rs 5,000 respectively.
Prepare:
i.                 Contract Account
ii.                Contractee’s Account for two years 2007 & 2008 taking into consideration such profit for transfer to profit & loss account as you think proper
iii.              Work-in-progress account and
iv.              Balance Sheet presentations of contract items

Q6. Sky Building Contractors obtained a contract to build a bungalow at a contract price of Rs 35,00,000. The contractors agree to pay 90% of the value of the work done as certified by the architect immediately on receipt of the certificate and to pay the balance in 2 years after the completion of the contract. Contractors commenced work on 1st May, 2006. A machine costing Rs 50,000 was specially brought and used for the contract. The value of the machine at the end of 2006 and 2007 and on completion of the contract at the end of 2008 was Rs 40,000, Rs 25,000 and Rs 10,000 respectively. The work done and certified by the architect at the end of 2006 and 2007 was Rs 8,75,000 and Rs 28, 25,000 respectively. Work costing Rs 50,000 done at the end of 2007 was not certified as on that date. The expenses on the contract were as under:

2006

2007

2008

Particulars

Rupees

Rupees

Rupees

Materials

4,50,000

5,50,000

3,15,000

Wages

4,25,000

5,75,000

4,25,000

Direct Expenses

17,500

62,500

22,500

Indirect Expenses
7,500
10,000
Nil
Prepare the contract account of Sky Building Contractors for all the three years, 2006, 2007 and 2008 and show the relevant figures in the Balance Sheet as at the end of the three years.

Q7. The following Trial Balance was extracted from the books of Jumbo Contractors as on 31st December, 2008:

Particulars

Rupees

Rupees

Contractee’s Account

 

3,00,000

Buildings

1,00,000

 

Creditors

 

62,000

Bank
35,000

Capital account

 

3,00,000

Materials

1,00,000

Wages

70,000

Expenses
37,000

Plant

2,50,000

Work-in-progress (Contract No. 837) 1.1.2008
1,00,000

Unadjusted Profit(Contract No. 837)

30,000
Total
6,92,000
6,92,000
Contract No. 837 which was in progress on 1st January, 2008 was completed on 31st March, 2008. Contract No. 838 commenced on 1st January, 2008.
Rs 20,000 materials and Rs 10,000 wages were paid for contract no. 837. Rs 60,000 materials were sent to contract no. 838 site but Rs 3,000 worth was lost there by accident. Rs 60,000 wages paid for contract 838. Rs 50,000 plant was used on contract no. 838 all through but plant costing Rs 2,00,000 was used on contract no. 837 and thereafter it was sent to contract no. 838. Materials worth Rs 4,000 were on site on contract no. 838 at the end of the year. Provide 10% depreciation on Plant and 2% on Buildings.
Contract No. 837 was for Rs 1,50,000 and certified work upto last year was Rs 1,00,000. The work has been certified upto the full extent but payment has been received upto 80% of the certified amount. The balance has not been paid yet nor has any entry been passed, on completion of the contract.
Expenses are charged to contracts on the basis of 50% of direct wages. The new contract is for Rs 4,00,000, 90% is paid on certification. The uncertified work of contracts as on 31st December, 2008 is estimated at Rs 15,000.
You are required to prepare:
a.     Contract No. 837 Account
b.     Contract No. 838 Account
c.     Profit & Loss Account for 2007
d.     Contract No. 837 Contractee Account
e.     Contract No. 838 Contractee Account
f.      Balance Sheet as on 31st December, 2008

Q8. The following Trial Balance was extracted as on 31st December, 2008 from the books of Eros Contractors:

Particulars

Rupees

Rupees

Share Capital: Share of Rs 10 each

 

3,51,800

P&L a/c on 1st January, 2008

 

25,000

Provision for depreciation on Machinery

 

63,000

Cash received on account of Contract 107

 

12,80,000

Creditors

81,200

Land & Buildings (at Cost)

74,000


Machinery (at Cost)

52,000

Bank
45,000

Contract 107:


Materials

6,00,000

Direct Labour

8,30,000

Expenses
40,000

Machinery on site (at cost)

1,60,000

Total

18,01,000
18,01,000
Contract 107 was started on 1st January, 2008. The contract price was Rs 24,00,000 and the customer has so far paid Rs 12,80,000 being 80% of the work certified.
The cost of the work done since certification was estimated at Rs 16,000.
On 31st December, 2008 after the above Trial Balance was extracted, machinery costing Rs 42,000 was returned to stores and material then on site were valued at Rs 27,000.
Provision is required to be made for direct labour due Rs 6,000 and for depreciation of all machinery at 12.50% on cost.
You are required to prepare:
a.     The Contract Account for Contract 107, giving a statement of profit, if any, to be properly credited to Profit & Loss Account for 2008
b.     General profit & Loss Account, and
c.     The Balance Sheet of Eros Contractors as on 31st December, 2008

Q9. A contractor secured a contract to supply and erect machinery for the sum of Rs 7,50,000. He was to receive payments on account form time to time equal to 90% of the certified value if the work done. He commenced work on 1st January, 2008 and incurred the following expenditure during the year.
Plant & Tools Rs 70,000; Machinery and Stores Rs 2,00,000; Wages Rs 1,50,000;  Sundry Expenses Rs 30,000; Establishment Expenses RS 40,000.
A part of the machinery costing Rs 20,000 was unsuited to the contract and was immediately sold at a profit of Rs 5,000.
The value of Plant and Tools on 31st December, 2008 was Rs 40,000 and the value of Machinery and Stores then in hand Rs 30,000.
By 31st January, 2009 he had received payments on account to Rs 4,38,750 being 90% pf the certified value of work done upto 31st December, 2008
In order to calculate the profit made on the contract upto 31st December, 2008 the contractor estimated the further expenditure that would be incurred in completing the contract and took to the credit of Profit & Loss Account for the year that proportion of the estimated net profit to be realised on contract which the certified value of the work done bore to the contract price. He estimated that:
a.     The contract would be completed in a further period of six months.
b.     Plant and tools would have a residual value of Rs 10,000 upon the completion of the contract.
c.     The cost of machinery & stores required in addition to those in stock on 31st December, 2008 would be Rs 1,00,000 and that further sundry expenses of Rs 20,000 would be incurred.
d.     The wages on the contract for the six months to 30th June, 2009 would amount to Rs 80,000.
e.     The establishment would cost the same sum per month as in the previous year.
f.      2.50% of the total cost of the contract (excluding this percentage) should be provided for contingencies.
Prepare the Contract Account for the year ended 31st December, 2008 and show your calculations of the profit to be credited to the Profit & Loss Account for the year.

Q10. Uddan Constructors Pvt. Ltd. provides you the following information:
a.     The project commenced on 1st September 2007 and it was estimated to be completed by 31st March, 2009.
b.     The contract price was negotiated at Rs 680 lacs.
c.     The actual expenditure upto 31st March, 2008 and subsequent additional estimated expenditure upto 31st March, 2009 is furnished as under:

 

 

Particulars

Actual Expenditure during 1-9-2007 upto 31-3-2008

(Rs)

Estimated Additional Expenditure during

 1-4-2008 upto 31-3-2009

(Rs)

Direct Material

1,95,60,000

1,27,40,000

Indirect Material

14,23,000

11,77,000

Direct Wages

42,46,500

41,33,500

Supervision Charges
4,14,400
5,55,600

Architect Fees

8,17,500

12,82,500

Construction Overheads

31,52,600
21,47,400
Administrative Overheads
14,16,000
24,34,000
Closing Material at site
7,50,000
-

Work Uncertified at the end of the year

13,80,000
-

Work certified during the year

3,50,00,000
3,30,00,000
The value of Plant and Machinery sent to site was Rs 60 lacs, whereas the scrap value of the plant and machinery at the end of the project was estimated to be Rs 3 lacs.
It was decided that the profit to be taken credit for should be that proportion of the estimated net profit to be realised on completion of the project which the certified value of work as on  31-3-2008 bears to the total contract price. You are required to prepare Contract Account for the period 31st March, 2008 along with the working of profit to be taken credit for.

Q11. A firm tendered for a contract putting in a tender price of Rs 25,00,000. After mutual discussions the price was reduced by 20% and the firm started work on the contract on 1-1-2008
The following information is available for the year ending 31st December, 2008:
Particulars

Rupees

Materials purchased for contract
5,00,000
Stores & spares consumed
45,000
Wages
2,64,000
Plant and Machinery
1,20,000
Overhead Expenses
51,000
Stock of materials on 31.12.2008
25,000
The machinery was purchased on 1st April, 2008. It has a working life of five years and its scrap value has been estimated at Rs 20,000. By 31st December, 2008 the contractor had received Rs 8,00,000 which represented 80% of the value of work certified on 15th December, 2008.
Expenses incurred after 15th December, 2008 upto31st December, 2008 were;
i. Materials Rs 12,000    ii. Wages Rs 11,000    iii. Overheads Expenses Rs 7,000
Prepare Contract Account showing the calculation of the profit, if any, to be taken credit for.

Q12. Deluxe Ltd. undertook a contract for Rs 5,00,000 on 1st July, 2008. On 30th June 2009 when the accounts were closed the following details about the contract were gathered:

Particulars

Rupees

Materials purchased
1,00,000
Wages paid
45,000
General Expenses
10,000
Plant purchased
50,000
Material on hand 30.6.2009
25,000
Wages accrued on 30.6.2009
5,000
Work Certified
2,00,000
Cash Received
1,50,000
Work Uncertified
15,000
Depreciation of Plant
5,000
The above contract contained and escalation clause which read as follows:
“In the event of prices of materials and rates of wages increased by more than 5% the contract price would 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 the work certified does not take into account the effect of the above clause.
Prepare the Contract Account. Workings should form part of your answer.

Q13. A construction company has undertaken to construct a small bridge. The following particulars related to this bridge for the year ended 31st December, 2008:
Particulars

Rupees

Materials: Direct Purchases
1,00,000
                 Issued from Stores
25,000
Wages
80,000
General Plant in use: Written Down Value
100,000
                                   Depreciation thereon
10,000
Direct Expenses
6,000
Share of General Overhead
3,000
Materials on hand at 31st December, 2008
4,000
Materials lost by fire
2,000
Materials sold
5,000
Value of work certified
3,00,000
Cost of uncertified work
6,000
The value of the contract is Rs 5,00,000 and it is practice of the contractee as per terms of the contract to retain 10% of the work certified.
From the above particulars prepare the Contract Account, and also show how the relevant items would appear in the Balance Sheet as on 31st December, 2008.

Q14. Pranlal Engineering Company undertakes long term contracts which involves the fabrication of prestressed concrete blocks and the erection of the same on consumers site.
The following information is supplied regarding the contract which is incomplete on 31st March, 2009.
Particulars

Rupees

Costs Incurred:

Fabrication costs to date:

Direct Materials
2,80,000
Direct Labour
90,000
Direct Overheads
75,000
Total
4,45,000
Erection costs to date
15,000
Total
4,60,000
Contract Price
8,19,000
Cash received on account
6,00,000
Technical estimate of work completed to date is as follows:
Fabrication:   Direct Materials                                                                   80%
                                                  Direct Labour and Overheads                 75%
                                                  Erection                                                                                        25%
You are required to prepare a statement for submission to the management indicating:
a.     The estimated profit on the completion of the Contract; and
b.     The estimated profit to date on the Contract

Q15. The following particulars are obtained from the books of Veena Construction Ltd. as on 31st March, 2009.
Plant and Equipment at cost                   Rs 4,90,000
Vehicles at cost                                                         Rs 2,00,000
Details of contract which remain incomplete as on 31.3.2009

V-29

V-24

V-25

Particulars

Rs (lacs)

Rs (lacs)

Rs (lacs)

Estimate final sales values

8.00

5.60

16.00

Estimate final cost

6.40

7.00

12.00


1.60

(-)1.40

 4.00

Wages

2.40

2.00

1.20

Materials

1.00

1.10

0.44

Overheads (excluding depreciation)

1.44

1.46

0.58

Total cost 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 Vehicles 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 Account for the year ended 31st March, 2009
ii.                Work-in-Progress as would appear in the Balance Sheet as on 31st March, 2009

Q16. A railway contractor makes up his accounts to 31st March. Contract No. SER/15 for construction of a culvert between Bandra and Khar Road commenced on 1st July, 2008. The costing records yield the following particulars as on 31st March, 2008
Particulars

Rupees

Materials charged to site
31,540
Labour
75,300
Foreman
11,700
A machine costing Rs 25,000 has been on site for 73 days. Its working life is estimated at five years and its final scrap value at Rs 1,000.
A supervisor, who is paid Rs 18,000 p.a, has spent approximately six months on this contract.
All other expenses and administration cost amounted to Rs 17,000.
Materials in store at site at the end of the year cost Rs 2,500
The contract price is Rs 3,00,000. At the end of the year two thirds of the contract was completed for which amount, the Architects certificate has been issued and Rs 1,60,000 has so far been received on account.
It was decided that the profit made on the contract in the year should be arrived at by deducting the cost of work certified from the total value of the architects certificate, that ⅓ of the profit so arrived at should be regarded as provision against contingencies and that such provision should be increased by taking in the credit of profit & loss account only such portion of the ⅔ profit as the cash received bore to the work certified.
Prepare a contract account showing profit or loss to be included in respect of this contract in the financial accounts to 31st March, 2009.

Q17. M/s Hind Corporation undertook a contract for erecting a sewerage treatment plant for Mumbai Municipality for a total value of Rs 24,00,000. It was estimated that the job would be completed by 31st January, 2009.
You are required to prepare the contract account for the year ending 31st January, 2009 from the following particulars:
i.                      Materials Rs 3,00,000
ii.                     Wages     Rs 6,00,000
iii.                   Overhead Charges Rs 1,20,000
iv.                   Special Plant Rs 2,00,000
v.                    Work certified was for Rs 15,00,000 and 80% of the same was received in cash.
vi.                   Materials lying on site as on 31.1.2009 Rs 40,000
vii.             Depreciate plant by 10%
viii.      5% of the value of material issued and 6% of wages may be taken to have incurred for the portion of work completed but not yet certified. Overheads are charged as a percentage of direct wages
ix.         Ignore depreciation of plant for use of uncertified portion of work
x.          Fine of Rs 10,000 is likely to be imposed for late completion of the contract.
xi.         Ascertain the amount to be transferred to Profit and Loss Account on the basis of realised profit.

Q18. In 2008 UK contractors Ltd. undertook three contacts one on 1st January, one on 1st July and one on 1st October. On 31st December, when their accounts were made up the position was as follows:

Contract 1

Contract 2

Contract 3

Particulars

Rupees

Rupees
Rupees
Contract Price

2,00,000

1,35,000

1,50,000

Expenditure:

 

 

 

Materials

36,000

29,000

10,000

Wages

55,000

56,200

7,000

General expenses

2,000

1,400

500

Plant installed

10,000

8,000

6,000

Materials on hand
2,000
2,000
1,000
Wages Accrued
1,700
1,800
800
General expenses accrued
300
200
100
Work certified
1,00,000
80,000
18,000
Cash received in respect thereof
75,000
60,000
13,500
Work finished but uncertified
3,000
4,000
1,050
The plant was installed on the dates of the contracts and depreciation is taken at 10% p.a. Prepare the respective accounts in the Contract Ledger and give suitable entries in the Company’s Balance Sheet.