Contact Costing

Contact Costing, also known as terminal costing, is a variant of job costing. In this method of costing, each contract is a cost unit and an account is opened for each contract in the books of contractor to ascertain profits/loss thereon.

Features of Contract Costing :- contract costing usually shows the following features :-

1. contracts are generally of large size and therefore, a contractor usually carries out a small number of contracts at a particular point of time.
2. A contracts generally take more than one year to complete 
3. work on contracts is carried out at the site of contracts and not in a factory premises.
4. each contract undertaken is treated a cost unit.
5. A separate contract account is prepared for each contracts in the books of contractor to the ascertain profit or loss on each contract.
6. nearly all labour cost will be direct .
7. most expenses (e.g. electricity, telephone, insurance, etc.) are also direct.
8. specialist sub contractors may be employed for say , electrical fittings, welding work, glass work, etc.
9. plant and equipment may be purchased for the contract or may be hired for the duration of the contract.

  Procedure :-     the basic procedure of contract costing is as follow :-

1. Contract Accounting :- each contract is allotted a distinct number and a separate account is opened for each contract.
2. Direct Cost :- most of the cost of a contract can be allocated direct to the contract. all such direct cost are debited to the contract account. direct cost for contracts include-    

• materials
• labour and supervision
• direct expences
• depreciation of plant and machinary
• sub- contract cost etc.

 3. Transfer of materials or plant :- when material ,plants or other items are transferred from the contract. the contract account is credited by that amount.

4. Contract Price :-  the contract account is also credited with the contract price. however, when a contract is not completed at the end of the financial year, the contract account is credited with the value of work-in- progress as on that day.

5. Profit or Loss on Contract :- the balance of contract account represents profit and loss which is transferred to profit and loss account. however, when contract is not completed within the financial year , only a part of the profit arrived is taken in to the remaining profit is kept as reserve to meet any contingent loss on the incomplete portion of the contract.