BBM 201 Unit 2, Lesson 4
UNIT 1 UNIT TITLE
LESSON 4 CONTRACT AND JOB COSTING
LESSON 5 SINGLE/OUTPUT/UNIT COSTING
LESSON 6 PROCESS COSTING
1
,BBM 201 Unit 2, Lesson 4
LESSON 4 CONTRACT AND JOB COSTING
TABLE OF CONTENTS:
4.0 OBJECTIVES
4.1 MEANING OF CONTRACT COSTING
4.1.1 PROCEDURE OF CONTRACT COSTING:
4.1.2 CALCULATION OF PROFIT AND LOSS ACCOUNT
4.2 COST PLUS CONTRACT
4.2.1 ESCALATION CLAUSE
4.3 PROFIT & LOSS ACCOUNT UNDER VARIOUS METHODS AND GIVE
YOUR RECOMMENDATIONS
4.4 JOB COSTING
4.4.1 JOB COSTING MAY BE EMPLOYED IN THE FOLLOWING CASES:
4.4.2 PROCEDURE OF JOB COST ACCOUNTING:
4.4.3 DEFECTS ARISE IN THE FOLLOWING CIRCUMSTANCES:
4.5 NUMERICALS
2
, BBM 201 Unit 2, Lesson 4
4. CONTRACT AND JOB COSTING
Contract costing is a specialised system of job costing which is applied in long
term contracts. This chapter deals with the various items of cost and the procedure
of recording cost incurred on contracts and method to determine profit in case of
incomplete contracts.
4.0 Objectives
To know the meaning of contract costing
To understand elements of cost in contract account
To deal with the methods for calculating profit or loss on contract accounts.
4.1 Meaning of Contract Costing
Contract or terminal costing, as it is termed is one form of application of the
principles of job costing. Contract costing is that form of specific order costing which
applies where work is undertaken on the special requirements of customer and each
order is of a long term period. Contract costing is usually adopted in civil
construction, engineering projects, ship building, road and railways line construction,
bridges etc.
Contract costing being a part of specific order costing method is applied
where substantial time is taken for completion of the work and which may even take
several years to get itself completed. However, some contract may even be finished
within a short duration and may not involve more than one accounting period. If the
profit on contracts is recorded only after their completion, then wide fluctuations in
the profit may be noticed in different accounting periods. It may be possible that in
some financially year only few contracts may be completed and in any other financial
year a large number of contracts may be completed. To avoid the fluctuations in the
reported profits and to reflect the revenue in the same accounting period during
which the activity is undertaken the profit in respect of each contract in progress is
transferred to the profit and loss account of the year by calculating the notional profit.
The portion of notional profit to be transferred to the profit and loss account depends
on the stage of completion of a contract.
Self-check Questions
1. What is contract costing? Explain
2. Mention the type of job where contract costing is applied.
3
UNIT 1 UNIT TITLE
LESSON 4 CONTRACT AND JOB COSTING
LESSON 5 SINGLE/OUTPUT/UNIT COSTING
LESSON 6 PROCESS COSTING
1
,BBM 201 Unit 2, Lesson 4
LESSON 4 CONTRACT AND JOB COSTING
TABLE OF CONTENTS:
4.0 OBJECTIVES
4.1 MEANING OF CONTRACT COSTING
4.1.1 PROCEDURE OF CONTRACT COSTING:
4.1.2 CALCULATION OF PROFIT AND LOSS ACCOUNT
4.2 COST PLUS CONTRACT
4.2.1 ESCALATION CLAUSE
4.3 PROFIT & LOSS ACCOUNT UNDER VARIOUS METHODS AND GIVE
YOUR RECOMMENDATIONS
4.4 JOB COSTING
4.4.1 JOB COSTING MAY BE EMPLOYED IN THE FOLLOWING CASES:
4.4.2 PROCEDURE OF JOB COST ACCOUNTING:
4.4.3 DEFECTS ARISE IN THE FOLLOWING CIRCUMSTANCES:
4.5 NUMERICALS
2
, BBM 201 Unit 2, Lesson 4
4. CONTRACT AND JOB COSTING
Contract costing is a specialised system of job costing which is applied in long
term contracts. This chapter deals with the various items of cost and the procedure
of recording cost incurred on contracts and method to determine profit in case of
incomplete contracts.
4.0 Objectives
To know the meaning of contract costing
To understand elements of cost in contract account
To deal with the methods for calculating profit or loss on contract accounts.
4.1 Meaning of Contract Costing
Contract or terminal costing, as it is termed is one form of application of the
principles of job costing. Contract costing is that form of specific order costing which
applies where work is undertaken on the special requirements of customer and each
order is of a long term period. Contract costing is usually adopted in civil
construction, engineering projects, ship building, road and railways line construction,
bridges etc.
Contract costing being a part of specific order costing method is applied
where substantial time is taken for completion of the work and which may even take
several years to get itself completed. However, some contract may even be finished
within a short duration and may not involve more than one accounting period. If the
profit on contracts is recorded only after their completion, then wide fluctuations in
the profit may be noticed in different accounting periods. It may be possible that in
some financially year only few contracts may be completed and in any other financial
year a large number of contracts may be completed. To avoid the fluctuations in the
reported profits and to reflect the revenue in the same accounting period during
which the activity is undertaken the profit in respect of each contract in progress is
transferred to the profit and loss account of the year by calculating the notional profit.
The portion of notional profit to be transferred to the profit and loss account depends
on the stage of completion of a contract.
Self-check Questions
1. What is contract costing? Explain
2. Mention the type of job where contract costing is applied.
3
