B. Com. / B. Com.

ABST
Semester IV

METHODS AND TECHNIQUES

OF COSTING

Section – A

1. Job and Contract Costing

2. Operating Costing

Dr. Shailesh Mathur

Associate Professor
Accountancy and Business Statistics
S. S. Jain Subodh P. G. College, Jaipur
 Contract Costing
As per ICMA “Contract costing is that form of costing which applies where work is
undertaken to customers special requirements and each order is of long duration. The work
nature is usually of constructional nature.”
In other words Contract Costing is the methods where each contract is treated as cost unit
and profit and loss is ascertained separately.
Contract or terminal costing, as it is termed, is one form of application of the principles of
job costing. In fact a bigger job is referred to as a contract. Contract costing is usually
adopted by building contractors engaged in the task of executing civil contracts.

Features of Contract Costing

1) The major part of the work in connection with each contract is ordinarily carried out at
the site of the contract.
2) Each contract is treated as a cost unit and a separate account is usually maintained for
each contract.
3) The contract has a long duration usually extending more than one accounting year.
4) All items of cost which are directly related to the contract are chargeable to respective
contract accounts.
5) Payment is made by contractee on the basis of work certificated by supervisor or
architect.
6) Through contract costing is a part of cost accounting, but it is purely based on the
principles of financial accounting.

Types of contract
1) Fixed Price Contract: The contractor agrees to a fixed contract price or rate.
2) Cost Plus Contract: Under cost plus contract, the contract price is ascertained by adding
a percentage of profit to the total cost of the work. Such type of contracts are entered into
when it is not possible to estimate the contract cost with reasonable accuracy due to
unstable condition of material, labour services, etc.
3) Contract with Escalation Cost: If during the period of execution of a contract, the
prices of materials, or labour etc., rise beyond a certain limit, the contract price will be
increased by the agreed amount. Inclusion of such a clause in a contract deed is called as
“escalation clause”.

Accounting Treatment of Contract

For accounting purpose contract divided in following categories:
1. Complete Contract
2. Incomplete Contract

1. Accounting for Complete Contract

In case of complete contract, contract account will be prepared as follows for calculation
of profit or loss on particular contract:

DSM @ Contract Costing 1

 Contract Account
Particulars Amount Particulars Amount
To Material Purchase xxx By Material Return to Store xxx
To Material Received from By Material transfer to
Store xxx other Contract xxx
To Material from other By Material at Site xxx
Contract xxx By Plant at Site (at WDV) xxx
To Wages xxx By Bank (Sale of material
To Accrued Wages xxx or plant) xxx
To Direct Expenses xxx By Bank (Price of extra
To Indirect Expenses xxx work) xxx
To Plant (at cost) xxx By Contractee a/c (with
To Cost of Sub Contract xxx contract price) xxx
To Cost of Extra work xxx
To Profit & Loss a/c xxx
=== ===
Note: Profit or loss on sale of plant and material or profit or loss on extra work will be
transferred to Profit & Loss Account.

2. Accounting for Complete Contract

In case of incomplete contract, contract account will be prepared as follows for
calculation of profit or loss on particular contract:
Contract Account
Particulars Amount Particulars Amount
To Material Purchase xxx By Material Return to
To Material Received from Store xxx
Store xxx By Material transfer to
To Material from other other Contract xxx
Contract xxx By Material at Site xxx
To Wages xxx By Plant at Site (at WDV) xxx
To Accrued Wages xxx By Bank (Sale of material
To Direct Expenses xxx or plant) xxx
To Indirect Expenses xxx By Bank (Price of extra
To Plant (at cost) xxx work) xxx
To Cost of Sub Contract xxx By Work-in-Progress a/c
To Cost of Extra work xxx Work Certified + + +
To Notional Profit a/c Work Uncertified + + + xxx
Profit & Loss a/c + + +
WIP a/c +++ xxx
=== ===

DSM @ Contract Costing 2

Concept Relating to Incomplete Contract
1) Work Certified: Work certified is that proportion of the work completed which has
been certified by the architect of the contractee.
2) Work Uncertified: Work certified is that proportion of the work completed which has
not been certified by the architect of the contractee.
3) Retention Money: Contractee retains some amount to be paid, after sometime, when
it is ensured that there is no fault in the work carried out by contractor and this
retained money is called as Retention Money.

Distribution of Profit or Loss in Contract Costing

1) Completed Contract
a) If Loss, Amount transferred to P&L Account
b) If Profit, Amount transferred to P&L Account

2) Incomplete Contract
a) If Loss, Amount transferred to P&L Account
b) If Profit, Some amount transferred to P&L Account and balance kept in reserve
(WIP a/c) as follows:
i) Work Certified is Less Than 25 Percent of Contract:
In this case no profit should be taken to profit and loss account.

ii) Work Certified is equal to or More Than 25 Percent But Less Than 50
Percent of Contract:
In this case amount transferred to the profit and loss account is calculated as
follows:
Estimated 1 Cash Received
X X
Profit 3 Work Certified

iii) Work Certified is equal to or More Than 50 Percent of Contract (But

Less Than 90 Percent):
In this case amount transferred to the profit and loss account is calculated as
follows:
Estimated 2 Cash Received
X X
Profit 3 Work Certified

iv) Near to Completion Contract (Completion of Contract is equal to 90

Percent or More Than 90 Percent):
In this case the profit to be taken to profit and loss account is determined by
using any one of the following formulas:

DSM @ Contract Costing 3

a) Estimated Work Certified
X
Profit Contract Price

b) Estimated Work Certified Cash Received

X X
Profit Contract Price Work Certified

c) Estimated Cost of work to date

X
Profit Estimated total cost

d) Estimated Cost of work to date Cash Received

X X
Profit Estimated total cost Work Certified

Calculation of Estimated Profit:

Statement Showing Estimated Cost and Estimated Profit of Contract

Contract Price ***

Less: Estimated Cost of Contract:
Cost of Work Done (as per contract a/c) +++
Estimated Additional Expenses required for
reaming work +++
===
Add: Provision for Contingencies + + + (- - -)
Estimated Profit ===

DSM @ Contract Costing 4

Dr. Shailesh Mathur
 “Operating costing applies where standardized
services are provided either by an undertaking or
by a cost centre within an undertaking”
-CIMA England
Characteristics
 Services rendered to customers
 A large proportion of the total capital is invested in fixed
assets
 Comparatively less working capital is required.
 The distinction between fixed cost and variable cost is of
particular importance.
 Transport services – Bus, truck companies, Railway,
Airlines.
 Supply services – Gas Company, water supply, electricity,
boiler House etc.
 Welfare services – Hospital, Canteen, Hotel, and Public
Library.
 Public services – Road maintenance, Road lights & other
public utility services etc.
 Undertaking/Business Simple Cost Unit Composite Cost Unit
Transport Business, Tram, Per passenger, Per km, Per passenger km
Railways, Roadways Per seat Per seat-km
Trucks and other loading Per tone, Per quintal, Per tone Km
vehicles Per km Per quintal km
Hospital Per bed, Per day, Per Per bed-day
patient Per patient-day
Electricity supply Per Kwt, Per hour Per Kwt-hour
Water supply Per Gallon, Per hour, Per Gallon-hour
Per litres Per 1000-litres
Hotel Per room, Per day, Per- Per room day
customer Per customer day
Canteen Per meal, Per person, Meals per person
Per cup tea Per cup-tea
Cinema, Theater etc. Per person, Per show Per person per show
A. Absolute Method:
Per Passenger Actual Actual Passenger
x
or Tone km = Distance or Weight

B. Commercial Method:
Per Passenger Total Average Passenger
= x
or Tone km Distance or Weight
Illustration: Calculate on the basis of the following information (a) Absolute
Tone-Km and (b) Commercial Tone-Km:
Route of Journey Distance (Km.) Weight Carried (Tones)
Jaipur to Ajmer 130 20
Ajmer to Bhilwara 137 16
Bhilwara to Udaipur 200 10
Udaipur to Jaipur 467 NIL

Solution:
A. Absolute Method: Σ (Actual Distance x Actual Weight)
Tone-Km = (130 x 20) + (137 x 16) + (200 x 10) + (467 x 0)
= 2600 + 2192 + 2000 + 0 = 6792 Ton-km

B. Commercial Method: Total Distance x Average Weight

Tone-Km = (130 + 137 + 200 + 467) x [(20+16+10+0) / 4]
= 934 x 11.5 = 10,741 Ton-km
 Collection of service expenses for specified period.
 Division of collected expenses between fixed &
variable expenses.
 Calculation of units for service rendered.
 Calculation of per unit cost by dividing total expenses
with units.
 Adding the profit in per unit cost and take the
decision as for fixing rates per passenger per
kilometer or per ton km. etc.
 Particular Amount
A. Standing Charges:
1. Administration Expenses ++++
2. Insurance ++++
3. License fee & Road tax ++++
4. Interest ++++
5. Rent, Rates & Taxes etc. ++++
TOTAL A =====
B. Running Charges:
1. Petrol or diesel ++++
2. Repair & Maintenance ++++
3. Wear & tear of tyres-tubes ++++
4. Depreciation etc. ++++
TOTAL B =====
Total Operating Cost (A+B) =====
Units =====
Cost Per Unit (Total Operating Cost /Units) =====
Add: Profit ++++
FARE PER UNIT #####
Illustration: From the following details calculate the fare to be suggested per
passenger for a Mini-Bus:
1) Length of route : 30 Kms.
2) Purchase price Rs. 4,00,000
3) Part of above cost met by loan, annual interest of which is Rs. 10,000
p.m.
4) Other annual charges: Insurance Rs. 15,000; Garage rent Rs. 60,000;
Road Tax Rs. 12,000; Repairs & Maintenance Rs. Rs. 20,000;
Administration Charges Rs. 50,000.
5) Running Expenses: Driver & Conductor Rs. 20,000 p.m.; Repairs /
Replacement of tyre tube Rs. 1,20,000 p.a.; Diesel and oil cost per Kms.
Rs. 10.
6) Effective life of vehicle is estimated at 5 years at the end of which it will
have a scrap value of Rs. 10,000.
7) Mini bus has 20 seats and is planned to make six two way trips for 25
days per month.
8) Provide profit @ 20% of total revenue.
Solution:
Total distance travelled by minibus in 25 days
= Length of the route (two sides) x No. of trips per day x No.
of days
= 60 Kms x 6 trips x 25 days
= 9,000 Kms.

Total passenger kms.

= Total distance travelled in 25 days x No. of passengers
= 9,000 kms. x 20 passengers
= 1,80,000 passengers kms.
 Statement Showing Suggested Fair
Particular Cost p. a. Cost p. m.
Fixed Expenses:
Interest on Loan 10,000
Insurance 15,000
Garage Rent 60,000
Road Tax 12,000
Repairs & Maintenance 20,000
Administration Charges 50,000
Depreciation [(4,00,000 -10,000) / 5] 78,000
2,45,000 20,417
Running Expenses:
Driver & Conductors Salary 20,000
Repairs / Replacement of tyre tube 1,20,000 10,000
Diesel and oil cost 90,000
Total Cost per Month 1,40,417
Add: 20% on total revenue (or 25% of total cost) 35,104
Total Revenue Needed 1,75,521
Rate per passenger Kms. = 1,75,521 / 1,80,000 = Rs. 0.9751