In contract costing , contract account
reveals
Answers
What Is a Contract Account?
When a contractor has accepted a contract, a separate account is opened for each contract, bringing together all the costs relating to a particular contract. A serial number is assigned to each contract, which is known as a contract account.
Explanation of Contract Account
All expenses incurred in fulfilling a contract (e.g., materials, wages, direct expenses, cost of sub-contracts, cost of special plants, and indirect expenses) are debited to a contract account.
Similarly, expenses accrued or outstanding on the contract at the end of the accounting period are also debited to the contract account. At the end of the accounting period, the following will appear on the credit side of the account:
Materials returned to the supplier
Materials and plant returned to store
Materials transferred to other contracts, stolen, destroyed, sold, or in hand
Materials and plant stolen or destroyed are abnormal losses and should be charged to the profit and loss account.
Similarly, profit or loss arising from the sale of the plant or materials should also be transferred to the profit and loss account by way of abnormal items.
The other items to be shown on the credit side of the contract account are contract price (in completed contracts) and the work-in-progress, which consists of the value of certified work and the cost of uncertified work (in incomplete contracts).
Example of Contract Account
An example of a contract account is given below.
Example of a Contract Account
Treatment of Specific Items in a Contract Account
This section provides an overview of the treatment of the various items that are included in the contract account.
(A) Materials
The cost of materials purchased directly or issued from stores will appear on the debit side of the contract account. Materials returned to suppliers and stores will appear on the credit side.
Amounts received from the sale of surplus materials will be credited to the contract account, while any profit or loss arising from them is to be transferred to the profit and loss account by way of abnormal items.
Materials that are lost, stolen, or destroyed by accident (e.g., in a fire) will be charged to the profit and loss account by way of abnormal loss.
The values of the material in hand at the end of the accounting period will appear on the credit side of the contract account.
Sometimes, materials are transferred from one contract to another contract. If so, then the contract receiving the materials is debited and the contract sending the materials is credited.
The following example shows how different material items should be treated in the contract account.
Example
A company undertook Contract No. 5 for the construction of a cinema building. He purchased materials for the contract at a cost of $80,000.
Issues from stores were $45,000. Materials valued at $3,000 were returned to stores, while materials costing $2,000 were stolen and those costing $500 were destroyed by fire.
Materials costing $5,000 were sold for $4,800. Materials worth $25,000 were received from Contract No. 3, which was completed. Materials worth $1,000 were transferred to Contract No. 15.
Materials in hand at the end of the accounting period were valued at $10,000.
Based on the above information, show the treatment of the materials in Contract Account No. 5.
Solution
Treatment of Materials in Contract Account
(B) Labor Cost
Every worker who is engaged at the site of a particular contract, irrespective of the nature of the work they perform, is treated as a direct worker, and they receive their wages as direct wages. Such wages are to be charged to the particular contract directly.
If a worker (generally the supervisory staff) is engaged at two or more contracts, his total wages may be apportioned to different contracts based on the time devoted to each one (or on some other equitable basis).
Wages accrued or outstanding at the end of the accounting period should appear on the debit side of the contract account.