Learning Objective of Contract Costing
Meaning of Contract Costing
Contract costing is that method of costing in cost accounting which is used to collect and identify all the expenses relating to a specific contract. For this purpose, Contractor has to maintain contract ledger in which he has to show contract account.
Contract here means an agreement to complete construction of building or any other engineering work which need many days, months or years to complete.
Contact account is that account who shows all the expenses in its debit side. Credit side of this account, we show value contract price or work certified value. Difference between debit and credit side of will show notional profit or loss.
Following are main Contract Expenses and Costs which shows in Contract Account under Contract Costing :-
1. Material Cost
Material or raw material which is used for construction is the main expense or contract cost and it will be debited in contract account. It is supplied from store or purchased from market directly. If material is transferred from any other contract, then its cost will be adjusted on the basis of material transfer note.
2. Labor Cost
On the basis of wages analysis sheet, labor cost is calculated for a specific contract order. If same labourer is used more than one contract, then time devoted to each contract is calculated and on this basis, labor cost is allocated.
3. Direct Expenses
We also add direct expenses, if any.
Overheads can be allocated on the basis of some % on cost of material, wages or prime cost or MHR or LHR.
5. Sub- Contract Cost
It will also include in contract cost, if to complete sub-construction for main construction.
6. Cost of Extra Work.
Importance of Contract Costing
Contract costing is important because with this method, we can calculate cost of big jobs. If we do n't know contract costing and calculating of profit under this method, we will use job costing method and result will not be awesome because many items like value of work certified, notional profit, contract price are not used in job costing. So, it is better for us to learn all things which is in contract costing.