Contract Costing: formula sheet

Key formulas

Contract price in a cost plus contract

Contract price = Total cost of contract + Agreed profit

Agreed profit may be a fixed sum or a percentage of cost. Check whether the percentage is on cost or on price.

Profit as a percentage of contract price

Profit on price (%) = Profit ÷ Contract price × 100

Profit of 20% on cost equals 16⅔% on price. Do not mix the two bases.

Basic contract account balance

Notional profit = Work certified (cumulative) + Closing work uncertified (at cost) + Closing stock of materials + Plant at site (depreciated value) − Total debits of the contract account

Used when the account is closed for an incomplete contract. Total debits are the opening balances of stock of materials, plant and work uncertified, plus all costs of the period. This is the same as: Notional profit = Work certified (cumulative) + Closing work uncertified (at cost) − Opening work uncertified (at cost) − Net cost of work done, where Net cost of work done = Total debits (excluding opening work uncertified) − Closing stock of materials − Plant at site (depreciated value). In the first year there is no opening work uncertified, so the formula reduces to: Notional profit = Work certified + Work uncertified − Net cost of work done. In a later year, the opening balances of stock of materials, plant and work uncertified are debited. Work certified is credited at the cumulative figure, so opening work certified is not debited or credited separately. This way the same work is not counted twice. Detailed treatment follows in later topics.

Net cost of work done

Net cost of work done = Opening stock of material + Opening plant at book value + Direct material + Direct labour + Direct expenses + Indirect costs specific to the contract + Plant at cost (if bought in the year) ± Adjustments for outstanding and prepaid expenses − Closing stock of material − Depreciated value of plant at site

Only costs specific to the contract are charged. Head-office overheads are excluded. Work uncertified is not part of net cost of work done. It is added on the credit side only, and in later years the opening work uncertified is deducted as shown in the basic formula above. For outstanding and prepaid expenses, add the closing outstanding and deduct the closing prepaid. Reverse the opening ones: deduct the opening outstanding and add the opening prepaid. Plant bought for the contract is charged at cost and its depreciated value at year end is credited. So for plant bought for the contract and still at site at year end, the net charge is its depreciation. Plant brought forward from an earlier year is debited at its opening book value instead. Closing stock of material is also deducted.

Cost of contract to date

Total debits − (materials returned, sold and at site + plant at site value)

If plant is shown as depreciation only, there is no plant credit. Do not deduct plant twice.

Wages for the year

Wages paid + outstanding at end − outstanding at start (prepaid: the reverse)

Apply the same accrual logic to other expenses.

Plant depreciation (straight line)

Cost × rate % × months at site ÷ 12

Use cost, or cost less scrap value, as the question says. Use the written-down value method only if stated.

Plant written-down value at site

Cost of plant − depreciation to date

This is the credit in the contract account when plant is debited at cost.

Loss or gain on materials sold

Cost of materials − sale proceeds

Credit the cost of materials, and debit the loss (or credit the gain) to the contract account.

Value of work done

Work certified + work uncertified (at cost)

Credit side of the contract account.

Notional profit

Value of work done + credits (returns, closing stock, plant value) − total debits

Equals value of work done − cost of contract to date.

Cash received

Cash received = Work certified − Retention money

If retention is a percentage of certified value: Cash received = Work certified × (100 − retention %) ÷ 100.

Retention money

Retention money = Work certified × retention %

Apply the percentage to work certified, not to cost or to the total contract price, unless the question says so.

Contractee's account balance

Balance = Work certified − Cash received

This equals the retention money due from the contractee.

Valuation rule

Work certified at contract price; work uncertified at cost

No profit is included in work uncertified.

Credit side of contract account

Work certified + Work uncertified + Closing materials at site + Plant at written-down value

Notional profit = total credits − total debits.

Notional profit

Notional profit = Work certified + Cost of work uncertified − Total cost incurred to date

Equivalent to work certified − cost of work certified, because uncertified work is valued at cost. Total cost is after adjusting for materials at site, accruals, prepayments and plant depreciation.

Stage of completion

Stage of completion = Work certified ÷ Contract price × 100

This percentage decides which fraction you apply.

Less than 25% complete

Profit transferred to P&L = Nil

The whole notional profit stays in reserve. Here 'less than 25%' means work certified below 25% of contract price.

25% or more but less than 50% complete

Profit transferred = 1/3 × Notional profit × (Cash received ÷ Work certified)

Cash received is normally work certified less retention money.

50% or more complete (contract still incomplete)

Profit transferred = 2/3 × Notional profit × (Cash received ÷ Work certified)

Use this when the contract is more than half done but not nearly complete.

Nearly complete contract

Profit transferred = Estimated total profit × (Work certified ÷ Contract price) × (Cash received ÷ Work certified)

Estimated total profit = contract price − (cost to date + estimated further cost). This is commonly used for nearly complete contracts, but other methods exist. Follow the method named in the question.

Profit held in reserve

Reserve = Notional profit − Profit transferred to P&L

This is the balancing figure on the debit side of the contract account (profit in reserve), carried forward. Only the profit transferred is credited to the profit and loss account.

Expected loss

Transfer the entire estimated loss to P&L in the current year

Do not apply any fraction to a loss.

Escalation amount (rate-based clause)

Escalation = (Actual rate − Base rate − Tolerance allowed, if any) × Quantity used

Apply to each input named in the clause. Use only the excess over the base or tolerance if the clause says so. If the actual rate is below base, the result is de-escalation.

Revised contract price

Revised price = Original price + Escalation − De-escalation + Price of extra work + Accepted claims

Use this revised price for all profit and percentage-of-completion working.

Cost-plus contract price (profit on cost)

Price = Total cost + (Profit % × Total cost)

Total cost includes extra work cost and the overheads allowed by the contract.

Cost-plus contract price (profit on price)

Price = Total cost ÷ (1 − Profit % on price)

Use when profit is stated as a percentage of contract price. Profit on price of 20% equals 25% on cost.

Profit on contract

Profit = Revised contract price − Total cost of contract

For incomplete contracts, apply the usual notional profit and transfer rules to the revised price.

Stage of completion (cost method)

Stage of completion % = Contract cost incurred to date (relating to work done) ÷ Total estimated contract cost × 100

Leave out costs of future activity, such as materials delivered to site but not yet used, from the cost to date. Treat them as part of the further cost still to be charged. So total estimated cost = relevant cost to date + further cost, where further cost includes the unused materials. The total therefore still includes them, and numerator and denominator are on the same basis.

Revenue to recognise (cumulative)

Cumulative revenue = Total contract price × Stage of completion %

Revenue for the year = cumulative revenue − revenue recognised in earlier years.

Profit to recognise

Profit recognised = Revenue recognised − Cost recognised

With the cost method this equals expected total profit × stage of completion %.

Expected loss on a contract

Expected loss = Total estimated cost − Total contract price (when positive)

Recognise the whole amount immediately as an expense.

Additional loss provision

Provision for foreseeable loss = Total expected loss − Loss already shown through revenue less cost to date

After this, the total charge to profit equals the full expected loss.

Outcome not reliably estimable (AS 7)

Revenue = Contract costs incurred that are likely to be recovered; Profit = nil

All costs are expensed in the period.

Quick revision

• Each contract is a separate cost unit with its own account.
• Most costs of a contract are direct, so they are charged straight to the contract account.
• Work certified is work approved by the contractee's architect or engineer.
• Work uncertified is work done but not yet certified, and it is valued at cost.
• Retention money is the part of certified value the contractee holds back until the contract is satisfactorily completed.
• Cash received equals work certified less retention money. Retention does not reduce the work certified credited in the contract account.
• Plant has two separate treatments. Method 1: debit plant at cost and credit its closing written-down value. Method 2: charge only depreciation to the contract. Use one, never both, or plant cost is counted twice.
• Take the profit rule that matches the stage of completion and the facts given in the question.
• On a loss-making contract, the entire expected loss is recognised in the period it becomes known.
• An escalation clause changes the contract price or the cost because input prices move beyond agreed limits.
• AS 7 applies to non-Ind AS entities and Ind AS 115 to Ind AS entities. Check the scope in the ICMAI study material.
• Show the working notes clearly, as marks are given for steps.

Common mistakes

• Saying contract costing and job costing are exactly the same. Fix: Remember that contract costing is a form of job costing for large, long-term, site-based work. Always add the points of difference.
• Treating all contract costs as indirect and apportioning them. Fix: Charge material, labour and expenses used on the contract directly. Charge only indirect costs specifically incurred for the contract, and leave out general head-office overheads. If a question gives a basis for allocating site-related overheads, follow that basis and state it clearly.
• Crediting plant at cost, or deducting both depreciation and plant value Fix: Choose one. Either debit cost and credit WDV at site, or debit only depreciation. Never do both.
• Charging a full year's depreciation on plant that arrived mid-year Fix: Multiply by months at site ÷ 12. Write the working under the account.
• Valuing work uncertified at contract price Fix: Uncertified work is always at cost. Only certified work is at contract price.
• Calculating retention on cost or on the total contract price Fix: Unless stated otherwise, retention is a percentage of work certified.
• Applying 2/3 or 1/3 without checking the stage of completion. Fix: Always calculate work certified ÷ contract price first and write the band before using any fraction.
• Valuing uncertified work at contract price instead of cost. Fix: Only certified work is shown at contract price. Uncertified work is carried at cost, so it adds no profit.
• Escalating on the whole actual cost instead of the excess over the base Fix: Compute only the rate difference after tolerance, multiplied by the quantity used.
• Ignoring the tolerance or limit given in the clause Fix: Underline the limit first. If escalation is payable only beyond 5%, deduct 5% of the base rate before multiplying.

Exam tips

• Write the definition in one sentence and then list features in numbered points. Examiners look for the key terms: site, long duration, specific order, stage billing.
• In comparison questions, use a table with at least five points. Each point must contrast both methods.
• In MCQs, watch for options that assign factory-based or continuous production features to contract costing. Those are wrong.
• In numericals, always state whether profit is on cost or on price before calculating.
• Keep this topic short and move to the contract account. Numerical questions on contract accounts are common, so use this topic as the base.
• Draw the two-sided account first and list every item from the question in order. Tick each as you post it.
• Show working notes for depreciation, accrued wages and loss on materials. Step marks are given for them even if the final profit is off.
• State your assumption in one line when the question is silent, such as 'uncertified work valued at cost' or 'no head office overheads charged'.