Advance Cost and Management Accounting Essay Sample

Contract costing is a system of occupation bing that is applied to comparatively big cost units. which usually take a considerable length of clip to finish. Building and construc¬tion work. civil technology and ship building are some illustrations of industries where big contract work is undertaken. and where contract costing is appropriate.

Contract Costing trades with the books of the Contractor merely. i. e. the cost of the work and mensurating the net income or loss on the contract. Contract bing is governed by IAS 11. Features of long term contracts

1. By contract bing state of affairss. we tend to intend long term and big contracts: such as civil technology contracts for edifice houses. roads. Bridgess and so on. We could besides include contracts for constructing ships. and for supplying goods and services under a long term contractual understanding.

2. With contract bing. every contract and each development will be accounted for individually ; and does. in many respects. incorporate the characteristics of a occupation bing state of affairs.

3. Work is often site based and takes a long clip to finish & amp ; may distribute over two or more of the contractor’s accounting old ages.
Accounting Considerations

-Contract Account
-Contract Net income and Loss Account
-Contractee Account ( e. g. Government of Jamaica )
-Balance Sheet Extract

Contract Account
A separate history will be kept for each contract with the general aim of estab¬lishing the overall contract net income or loss. To make this the undermentioned entries are required: Contract Account
Typical Debit EntriesTypical recognition entries
Direct costs ( Material. Labour ) Credit Plant. Materials transferred from Contract Direct disbursals ( Plant hire. Sub- contractors. Architects’ fees. etc. ) Material. works c/d
Cost of Plant boughtCost of work certified ( cost of gross revenues )
Debit any stuffs. works etc. transferred to contractCost of work non certified ( WIP c/d value of contract ) Debit Head Office Charges
In add-on there are. of class. contra entries within the contract history associating to transport forward/brought frontward points. accumulations and prepayments.

Contract ‘Plant’
A characteristic of most contract work is the sum of works used. This includes Cranes. trucks. excavators. sociables and lorries. The usual ways in which works costs are dealt with are as follows: –

( a ) When works is leased –The leasing charges are charged straight to the contract.
( B ) When works is purchased. There are two methods in common usage.

I. Charge new works at cost to the contract for which it was purchased. When the works is no longer required and is transferred to another contract or base. the original contract would be credited with the 2nd manus value ( NBV @ day of the month of works transportation ) . In this manner the contract bears the charge for the depreciation incurred. Another option would be to merely bear down the depreciation for the period to the contract history ( debit entry ) .

two. Where works is moved often from contract to contract or where contracts are comparatively short. a “Plant Service Department” is created. This section organises the transportation of works from contract to contract as required and each contract is charged a day-to-day or hebdomadal lease.

Note: Whatever method is used for bear downing the capital costs of works. the ordinary running costs. fuel. fixs and insurance would be charged straight to the contract.

The in agreement keeping rate is 10 % of the value of work certified by the con-tractee’s designers. Contract C is scheduled for passing over to the contractee in the close hereafter. and the site applied scientist estimates that the excess costs required to finish the contract. in add-on to those tabulated above. will number $ 305. 000. This sum includes an allowance for works depreciation. construc¬tion services and for eventualities.

Contract Profit and Loss Account

Guidelines on ciphering interim net incomes

Assorted possibilities exist for gauging the net income on uncomplete contracts and several options are shown below. However a prudent position must ever be taken and the net income should reflect the grade of completion. You are recommended to follow the undermentioned guidelines:

1. If the contract is at an early phase ( say. less than 35 % complete ) no net income should be taken. Interim net incomes. nevertheless deliberate. should merely be taken when the concluding contract result can be assessed with sensible confi¬dence.

2. If a loss is incurred. the prudence construct should be applied. and the entire loss should be recognized in the period in which it is incurred. Where farther extra hereafter losingss are anticipated. all of the loss should be recognized every bit shortly as it is foreseen and added to the cost of gross revenues.

3. Significant costs have been incurred
When significant costs have been incurred ( state the contract is 35 % – 85 % complete ) a expression which has traditionally been used in the building industry is:

Formula for contract 35 – 85 % complete
Net income taken = 2/3 of the Notional Profit Xcash received from advancement payments value of work certified
Where the Notional Net income is Value of Work Certified – Cost of Work Certified.

4. Contract Approaching Completion – ( say. over 85 % complete )
When the contract is approaching completion ( say. over 85 % complete ) and the eventual net income can be assessed with sensible certainty there is no demand for inordinate prudence and one of the undermentioned methods may be used:

a. Formula for contract 85 % and over complete and there is a Contract Retention Percentage Profit taken =Progress payments to dateX estimated entire net income on completion
contract monetary value

B. Formula for contract 85 % and over complete and there is NO Contract Retention or progress payment In the improbable event of there being no keeping or progress payment by the client the expression would be:

Net income taken =Value of work certified X estimated entire net income on completion contract monetary value
c. Completed Contract Formula
This expression must be used in the concluding twelvemonth when a contract is complete.
Net income taken =Value of work certified – Cost of work certified

LQ Solution Continue “Contract P & A ; L Account”

[ 1 ] Calculate the stage/degree of completion for each contract Surveys of work performed methodABC
Phase of Completion =

Value of Work Certified
Contract Price200
1760 = 11 % 860
1485 = 58 % 2100
2420 = 87 %

[ 2 ] Calculate whether each contract has made a loss to day of the month or is expected to do an overall loss.

For contracts where costs to the terminal of the contract term is non readily
available usage the undermentioned expression:
Net income or loss to day of the month = Value of work certified – Cost of work certified to day of the month