Cost and Management Accounting
In this articles we are providing TYBCOM-SEM VI- COST ACCOUNTING l Contract Costing MCQ with Answer PDF. TYBCOM-SEM VI- COST ACCOUNTING l Contract Costing MCQ with Answer Semester VI. We are providing 200+ MCQ with answer.
Contract Costing
Meaning:
Contract Costing is that form of costing which applies where the work is undertaken to customer’s special requirements and order which is of a longer duration, and which is carried out at site which is different from contractor’s premises.
Under Contract Costing the work is usually of a constructional nature e.g. construction of Road, building, bridge and other civil engineering works etc.
A separate Account is opened for each contract and all the expenses incurred on it either at site of at office are charged to that particular Account.
Indirect expenses of Head Office are apportioned over all the contracts on hand on suitable basis.
Contract:
A contract is a legally enforceable agreement. Since the jobs involved are large, involving substantial money and time, a written agreement is entered into setting out the main terms and conditions of the contract.
Contractor:
The person who undertakes the job is the contractor.
Contractee:
The person for whom the job is being done is the contractee.
The Contract Price:
The contract price is the amount agreed to be paid by the contractee to the contractor as consideration for the job done. The contract price may be payable in lumpsum when work is completed. Alternatively, the amount may be paid in instalments as the work progresses. The amount of each instalment would depend on the amount of work done and certified by the architects.
Types of Contract:
Contracts are basically of two types:
a) Fixed price Contract, where a fixed price is payable for completion of the entire job.
b) Cost Plus Contract, where the contractee pays the contractor his actual costs plus a margin of profit or a fixed fee.
Work Certified:
It is that part of work completed for which the contractor gets the certificate of the Architect. In the case of large contracts, the contractor would expect the contractee to make payments of the contract price in instalments. He therefore, sends a part bill to the contractee as and when a portion of the work is completed. An Architect, appointed in terms of the contract, between the contract and contractee, scrutinizes the part bill; he certifies the work done for the purposes of payment.
Work Certified appears on the credit side of the Contract Account.
Methods of Recording:
Method I
A) In case of a small contract which is completed within one year
a) When work is certified
Value of work certified is debited to Contractee’s A/c and credited to Contract A/c.
b) When amount is received:
Amount received is debited to Cash A/c and credited to Contractee’s A/c.
Method II
B) In case of large contract continuing for more than 1 year:
a) When work is certified
Work certified is debited to work-in-progress A/c and credited to Contract A/c.
b) When Cash is received:
The amount received is debited to Cash A/c and credited to Contractee’s A/c.
Work Uncertified:
Work uncertified is that cost of work done which relates to the period between the date of work certified and accounting year ending. At the end of the accounting period, not all the work done would have been certified by the architect. This would be so because the bill itself would not have been submitted by the contractor. Suppose the accounting period ends on 31st December. The contractor would have submitted his bills which would probably include all expenses incurred by him upto 10th December, and this might be certified for payment by the architect. The expenses incurred by the contractor between 11th December, and 31st December is the cost of Work Uncertified.
Work uncertified appears on the credit side of the Contract Account.
Journal entry:
Work-in-Progress A/c Dr.
To Contract A/c
Retention Money:
Retention money is that part of work certified which is retained by the contractee so as to safeguard his interest in case of future defects in the work done.
Profit on Incomplete contracts:
Where the contract is very large and is to continue over a number of years, it is usual to credit a part of the profit to the Profit and Loss Account each year i.e. even when the contract is not completed.
The standard rules for taking such profits can be summarized as follows:
Sr. No. | Extent of Work Completed | Profit to be Considered |
1 | Less than 25% 1% to 24% | No Profit is transferred to Profit & Loss A/c – entire profit is left as Reserve. |
2 | 25% or more but less than 50% 25% to 49% | 1/3rd of Notional Profit transferred to Profit & Loss A/c and balance is left as Reserve |
3 | 50% or more 50% & above | 2/3rd of Notional Profit transferred to Profit & Loss Account and balance left as Reserve. |
Sometimes profit is arrived by above method is further reduced by multiplying if further with:
Cash Received
Work Certified
Note: In case there is loss, full loss will be transferred to Profit & Loss Account.
Profit in case of Contract which are nearing successful completion:
A contract is said to be nearing successful completion when it has reached a stage that the contractor can estimate the further expenditure to be incurred to complete the contract. In this case, the future costs to be incurred on the contract can be estimated and therefore it would be possible to complete the Estimated Profit on the contract on a Prospective Basis. For this the total cost incurred on the contract to date are first calculated. To this is added an estimate of future cost determined on a conservative basis. The total of these two items will be deducted from the total Contract price. The difference will be the Estimated Profit on the Contract.
Escalation Clause:
This is a clause provided in the contracts to cover up an changes in the price of contract due to changes in price of raw materials and labour charges in utilization of factors of production. The object of this clause is to sage guard the interest of both sides against unfavorable change in the price.
Practical Problems
1. M/s. AB & Associates, a partnership firm comprising of partners A and B, undertook a contract to build a Bridge for Rs. 20,00,000 and commenced the work on 1-10-2008. The following is the Trial Balance of firm as on 30.09.2009:
Particulars | Debit Rs. | Particulars | Credit Rs. |
Plant & Machinery Office Buildings Materials purchased Sub-contracting charges Interest Office Overheads | 2,50,000 3,00,000 4,20,000 1,40,000 80,000 10,000 50,000 12,50,000 | Capitals: A B Advanced from contractee Bank overdraft Outstanding wages Creditors Loans | 1,20,000 80,000 6,00,000 1,40,000 10,000 1,50,000 1,50,000 12,50,000 |
Additional Information:
1. Materials worth Rs. 4,00,000 were sent to site.
2. Outstanding sub-contracting charges Rs. 20,000 at the year end.
3. Allocate 50% of office overheads and 100& wages to contract.
4. Plant and Machinery were used for the whole year on contract and provide depreciation @ 10% p.a.
5. Partner A was entitled to salary of Rs. 20,000 for site supervision for the year.
Provide the same in Account.
6. Contractee pays 75% of the work certified.
7. Partner A and B share profit and losses in the ration 6:4 respectively.
8. At the end of the year, work uncertified valued at Rs. 10,000 and material at site Rs. 20,000.
Prepare contract Account, Profit and Loss Account for the year ended 30.09.2009 and Balance sheet as on that date.
2. S. V. Construction Ltd. have obtained a contract for construction of a Building. The value of the contract is Rs. 45,00,000. The work commenced on 1st July, 2007 and was completed on 31st December, 2008. The following information relates to the contract:
Particulars | 31.12.2008 Rs. | 31.12.2007 Rs. |
Materials issued Direct wages Direct Expenses Indirect Expenses Plant issued Sub Contract charges Work certified (cumulative) Work uncertified | 13,50,000 10,35,000 1,00,000 27,000 - 60,000 45,00,000 - | 3,75,000 4,70,000 45,000 6,000 63,000 15,000 10,00,000 35,000 |
The above plant was specially issued for the contract. The residual value of the plant at the end of project was estimated to be Rs. 3,000.
The contractee has agreed to pay 90% of the work certified. The accounts are closed on 31st December, every year. Prepare:
a) Contract Account
b) Contractee Account
For two years 2007 and 2008. Show the relevant items in balance sheet as on 31.12.2007.
3. Siddesh Construction Company has undertaken three contracts during the year and the following particulars are available as on 31st December, 2008:
Particulars | Contract A Rs. | Contract B Rs. | Contract C Rs. |
Contract Price Material issued to Contract Labour Sub-Contract Charges Supervision Charges Architect Fees Insurance Charges Work Certified Work Uncertified Amount received from Contractee Closing Stock of Material | 10,00,000 1,65,200 1,02,800 72,800 12,00 10,000 3,000 4,00,000 35,000 3,20,000 9,000 | 23,00,00 2,24,500 1,26,500 65,900 18,000 15,000 6,100 5,00,000 40,000 4,50,000 10,000 | 7,50,000 1,89,600 1,75,500 28,500 15,000 25,000 7,400 5,00,000 25,000 3,75,000 20,000 |
All contracts were commenced during the current year. Total depreciation on plants amounted to be Rs. 11,200 and allocate the same to all contracts in the ratio of work certified.
Prepare Contract Account. Show the calculation of profit transferred to Profit & Loss Account.
4. M/s. ABC Enterprises secured a contract for Rs. 45,00,000 and as per the Contract Agreement, the contractee would pay 90% of the work certified immediately upon Architects Certificate and the balance would be paid on completion of the contract. The work has commenced on 01.04.2008. The Actual Expenditure upto 31st March, 2009 and Estimated Expenditure upto 30th September, 2009 are as follows:
Particulars | Actual Expenditure upto 31.03.09 Rs. | Estimated Expenditure upto 30.09.09 Rs. |
Direct Materials Indirect Materials Direct Wages Sub-contract charges | 10,50,000 1,77,500 2,60,820 31,030 | 9,25,000 2,37,500 2,49,180 16,470 |
Architect Fees Administrative Overheads Hiring charges for equipment Closing material at site Certified work (Cumulative) Uncertified work | 57,500 2,14,390 1,45,610 1,29,000 22,50,000 56,250 | 90,000 1,37,110 79,390 - 45,000 - |
A special machinery costing Rs. 4,00,000 was purchased for use on the contract. Its estimated scrap value at the end of the contract would be Rs. 40,000.
It was decided that the profit to be taken credit for the year ended 31.03.2009 should be proportion of the estimated net profit to be realized on the completion of the contract which the cash received for the year bears to the contract price. Prepare Contract Account for the year ended 31.03.2009 and estimated Contract Account.
5. Bhushan Contractors Ltd. obtained the contract to construct a building for Rs. 35,00,000. The contractee agrees to pay 90% of the work certified immediately upon the receipt of the certificate from the Architect and the balance amount would be paid in the completion of contract.
The work was commenced on 1st July, 2007 and completed on 30.09.2009.
A machine costing Rs., 45,000 was specially brought for use on contract and it would not fetch any value upon completion of the contract.
Further details are as follows:
Particulars | Years 2007 | Years 2008 | Years 2009 |
Work Certified (Cumulative) (Rs.) Work Uncertified (Rs.) Materials Purchased Steel (Tons) Price per Ton (Rs.) Bricks (Nos.) Price per Brick (Rs.) Wages (Rs.) Direct Overheads (Rs.) Indirect Materials (Rs.) Materials Returns Steel (Ton) Bricks (Nos.) Materials Lost in Accident Steel (Tons) Materials Sold Steel (Tons) Sale price per Ton (Rs.) Scrapped Value of Bricks (Rs.) | 8,75,000 - 16 25,000 16,000 5.00 4,25,000 17,500 7,500 1 1,000 - - - - | 28,25,000 50,000 20 26,000 20,000 5.50 5,65,000 44,500 10,000 - - 2 - - - | 35,00,000 - 15 26,500 10,000 6.00 4,17,000 10,000 4,000 - - - 4 27,000 18,000 |
You are required to prepare Contract Account and Contractee Accounts for the years 2007, 2008 and 2009 in the books of the company. The accounts are closed on 31st December, each year.
6. M/s. Rajendra constructions obtained a contract to build a Fly-over bridge at a contract price Rs. 150 Lacs.
The contractee agrees to pay 90% of value of the work done as certified by the architect immediately on receipt of the certificate and to pay the balance on completion of the contract. The contractor commenced the work on 1st May, 2008 and it is estimated to completed by 31st December, 2009. The actual expenditure upto 31st March, 2008 and subsequent estimated expenditure upto 31st December, 2009 is furnished below:
Particulars | Actual Expenditure upto 31.03.2009 Rs. | Estimated Expenditure 1.4.2009 to 31.12.2009 Rs. |
Direct Materials Indirect Materials Direct Wages Sub Contract Charges Architect’s Fees Administrative Overheads Special Equipment Charges Supervision Charges Establishment Charges Other Details Cash Received Closing Material at site Uncertified Work Certified work (cumulative) | 33,50,000 5,60,000 8,42,000 98,000 1,84,000 6,50,000 4,86,000 10,000 p.m. 8,000 p.m. Actual (Rs.) 67,50,000 4,10,000 1,80,000 75,00,000 | 28,00,000 7,00,000 7,95,000 52,000 2,84,000 4,50,000 2,54,000 12,000 p.m. 9,000 p.m. Estimated (Rs.) 82,50,000 - - 1,50,00,000 |
A special machinery costing Rs. 13,40,000 was bought for the contract and the estimated scrap value of the machinery at the end of the contract would be Rs. 1,40,000. It is decided that the profit to be taken credit for should be that proportion of the estimated net profit to be realized on completion of the contract which the certified values of work as on 31st March, 2009 bears to the total contract price. Maintain 2% provision for contingencies on total cost of contract (excluding such provision for contingencies). You are required to prepare the Contract Account for the period ending 31st March, 2009 and show your calculation of the profit to be credited to the Profit and the Loss Account for the period ended 31st March, 2009.
7. The following information relates to a building contract undertaken by M/s. Asmit Ltd. for Rs. 10,00,000 and for which 80% of the value of work certified by the architect is being paid by the contractee.
Particulars | I Year | II Year | III Year |
Material issued Direct wages Direct Expenses Indirect Expenses | 1,20,000 1,10,000 5,000 2,000 | 1,45,000 1,55,000 17,000 2,6,00 | 84,000 1,10,000 6,000 500 |
Work Certified Uncertified Work Plant Issued Material on site | 2,35,000 3,000 14,000 2,000 | 7,50,000 8,000 - 5,000 | 10,00,000 - - 8,000 |
The value of plant at the end of I, II and III year was Rs. 11,200, Rs. 7,000 and Rs. 3,000 respectively. Prepare contract account for these three years.
8. The following Trail Balance was extracted from the books of Apollo Contractor as on 31st December, 2008:
Particulars | Dr. Rs. | Cr Rs. |
Contractee’s Account Buildings Creditors Bank Capital Account Materials Wages Expenses Plant Work in Progress 9Contract No. 837) (1.1.2008) Contract No. 837 A/c (1.1.2008) (Unadjusted Profit) | - 1,00,000 - 35,000 - 1,00,000 70,000 37,000 2,50,000 1,00,000 - 6,92,000 | 3,00,000 - 62,000 - 3,00,000 - - - - - 30,000 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 site. Material Rs. 6,000 issued to Contract No. 838, but Rs. 3,000 worth was lost by accident, Rs. 60,000 Wages paid for Contract No. 838. Rs. 50,000 Plant was used in Contract No. 838 all through but plant costing Rs. 2,00,000 was used on Contract No. 838 from 1st April, 2008, prior to that, the above machinery was used in Contract No. 837. Rs. 4,000 materials were at site on Contract No. 838 at the end of the year. Provide 10% depreciation on the Plant and 2% on buildings.
Contract No. 837 was for Rs. 1,50,000 and certified work upto last year 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 aid 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 and 90% is paid on certification. The uncertified work of the contract s 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 2008
d) Contract Ni. 837 Contractee’s Account
e) Contract No. 838 Contractee’s Account
f) Balance Sheet as on 31st December, 2008.
9. A undertook a contract for Rs. 5,00,000. He incurred the following expenses during the year:
Particulars | Rs. |
Materials issued from Stores Materials purchased for the Contract Plant installed at Cost Wages paid Wages accrued due on 31.12.2008 Direct Expenses paid Direct Expenses accrued due on 31.12.2008 Establishment Expenses | 50,000 45,000 35,000 1,00,000 40,000 10,000 2,500 6,500 |
Of the plant and material charged to the contract, the plant which cost Rs. 2,000 and the materials costing Rs. 1,500 were lost. Some of the material costing Rs. 2,000 was sold for Rs. 2,500. On 31st December, 2008, the plant which cost Rs. 500 was returned to the stores and a part of the plant which cost Rs. 200 was so damaged as to render itself useless.
The work certified was Rs. 2, 40,000 and 80% of the same was received in cash. The cost of work done but uncertified was Rs. 1,000. Charge 10% p.a. depreciation on plant and prepare contract account for the year ended 31st December, 2008 by transferring to Profit and Loss Account the portion of profit, if any, which you think reasonable.
Show also the particulars relating to the contract in the balance sheet of the contractor as on 31st December, 2008.
Following information relates to a building contract commenced on 1st April 2014 for Rs. 10,00,000.
Particulars | 2014-15 Rs. | 2015-16 Rs. |
Materials Issued Direct Wages Outstanding Wages Sub-Contract Charges Indirect Expenses General Expenses Supervision Charges Work Certified (Cumulative) Work Uncertified Materials at site at the end | 3,02,000 2,00,000 20,000 12,000 10,000 6,000 10,000 7,50,000 8,000 5,000 | 84,000 1,00,000 10,000 1,400 5,000 10,00,000 |
Plant Issued Materials returned to stores Cash received from the Contractee during the year | 14,000 2,000 6,00,000 | 2,000 5,000 4,00,000 |
The value of Plant at the end of 2014-15 and 2015-16 was Rs. 7,000 and Rs. 5,000 respectively.
Prepare Contract Accounts for the years 2014-15 and 2015-16.
11. Saurav Ltd. obtained two contracts viz., A and B. Contract A commenced on 1st October, 2014 and Contract B started on 1st December 2014. Following information was extracted from their books for the year ended 31st March 2015.
Particulars | Contract A Rs. | Contract B Rs. |
Contract Price Cash Received Plant issued at commencement Work Certified Work Uncertified Direct Wages Supervision Charges Administrative Overheads Sub-Contract Charges Electricity Charges Architect’s Fees Indirect Materials Direct Materials Direct Materials returned to Stores Direct Materials at the site at the end of the period. | 70,00,000 11,20,000 22,50,000 14,00,000 52,000 2,95,000 1,36,500 2,72,500 63,700 48,800 52,000 1,47,000 3,58,000 14,000 73,000 | 15,00,000 7,65,000 12,00,000 9,00,000 28,000 1,77,500 30,700 1,47,500 27,000 1,62,600 1,99,200 54,000 |
Provide depreciation @20% p.a. on the original cost of Plant.
Prepare Contract A and Contact B Account for the period ended 31st March ended 2015.
Cost and Management Accounting
Contract Costing
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