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CMA Intermediate · Cost Accounting

Contract Costing for CMA Intermediate Cost Accounting

Contract costing is a job-costing method for large, long-running work done at the customer's site, such as a bridge or building. Each contract gets its own account. You collect costs, add work certified and uncertified, apply retention rules, and compute profit to be taken on incomplete contracts.

What this chapter covers

Contract costing is used when a firm takes up a big job that runs for months or years, usually at the customer's site. Each contract is treated as a separate cost unit with its own account. You record materials, labour, direct expenses, plant usage and overheads against it, then compare them with what the contractor has billed and earned.

The chapter has a clear flow. First you learn the features and the contract account. Then you learn the terms that link cost to revenue: work certified, work uncertified, retention money and cash received. Next comes the main numerical skill: deciding how much profit to take on a contract that is not yet complete. Finally you handle escalation clauses, cost plus contracts and extra work, and read about the accounting standards on contract revenue. AS 7 (Construction Contracts) applies to entities that still follow Indian GAAP (Accounting Standards), while Ind AS 115 applies to entities that follow Ind AS. AS 7 is not a counterpart of Ind AS 115 for Ind AS entities. Check the exact scope of this standards topic in the ICMAI study material.

In the paper, this chapter connects to job costing and batch costing, because the logic of collecting costs by cost unit is the same. It also links to material and labour costing, overhead absorption and cost sheets. If those basics are weak, contract problems will feel harder than they are.

Contract costing is a compact chapter with a predictable numerical pattern, so it rewards practice. Most questions ask you to prepare a contract account, find the profit to be credited to the profit and loss account, and show the balance sheet figures. The method is mechanical once you know the rules, which makes it a good source of full marks in a 14-mark question. It can also feed a short MCQ on terms such as retention money or notional profit. Because the steps carry marks, a neat layout earns marks even if one figure goes wrong.

Contract Costing: topics in the order to study them

  1. 1Introduction to Contract CostingStart with the features, the terms and how contract costing differs from job costing, so the later layouts make sense.
  2. 2Contract Account and Cost ElementsYou need to know what goes on the debit side, how plant, materials at site and overheads are treated, before you can find any profit.
  3. 3Work Certified, Work Uncertified and Retention MoneyThese items link cost to revenue and cash received, and every profit calculation depends on them.
  4. 4Profit on Incomplete ContractsThis is the core numerical skill, built on the previous two topics, and the most tested part of the chapter.
  5. 5Escalation Clause, Cost Plus Contracts and Extra WorkThese adjust the contract price or cost, so learn them only after the basic account and profit rules are firm.
  6. 6Contract Accounting Standards: AS 7 and Ind AS 115Finish with the standards, which explain the reasoning behind profit recognition and the stage of completion approach. Note that AS 7 is for non-Ind AS entities and Ind AS 115 is for Ind AS entities, and check the scope in the ICMAI study material.

How to prepare Contract Costing

Contract costing is best learned by doing full problems, not by reading alone. Build the method first, then add the special cases.

  1. Read the features and key terms once, and write a one-line meaning of each term in your own words.
  2. Draw the contract account layout from memory: debit side costs and work in progress items, credit side materials returned, plant at site, work certified and uncertified.
  3. Practise finding work certified, uncertified work and cash received from a given set of data before attempting profit.
  4. Learn the profit rules on incomplete contracts by stage of completion and cash received, and solve at least one problem for each rule.
  5. Solve problems with escalation, cost plus terms and extra work, and note exactly which figure each clause changes.
  6. Read the AS 7 and Ind AS 115 portion for the principle behind recognising profit, remembering that AS 7 applies to non-Ind AS entities and Ind AS 115 to Ind AS entities. Prepare two or three lines you can write as theory, within the scope given in the ICMAI study material.
  7. Finish with timed full-length questions, writing the contract account, the working notes and the balance sheet extract in the format you will use in the exam.

Common mistakes in Contract Costing

  • Treating retention money as a cost or deducting it from work certified or from profit.

    Fix: Retention does not change the work certified credited in the contract account. It only reduces cash received. Use the cash-received ratio only in the specific profit rules that require it.

  • Valuing work uncertified at contract price instead of cost.

    Fix: Show work uncertified at cost, as it has not been approved, and keep it separate from work certified.

  • Using the wrong profit rule for the stage of completion.

    Fix: Check the percentage completed and what the question gives, then choose the matching rule and state it in your working.

  • Counting plant twice, or charging full plant cost to the contract while plant is still in use.

    Fix: Choose one method as the question requires. Method 1: debit plant at cost and credit the closing written-down value. Method 2: charge only depreciation. Never combine them.

  • Missing the effect of extra work or escalation on the contract price.

    Fix: Underline every adjustment in the question and add it to the contract price or cost before computing profit.

  • Skipping the balance sheet extract.

    Fix: If the question asks for it, show work in progress, less cash received or progress payments, in a clear layout.

Last-day revision: Contract Costing

  • 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.

Contract Costing practice questions

Contract Costing in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Contract Costing: frequently asked questions

Is Contract Costing an important chapter for CMA Inter Cost Accounting?

Yes, it is a practical chapter where numerical questions follow a steady pattern. If you practise the contract account and profit rules, you can score well. It may also be asked as a short MCQ on terms.

What is the difference between work certified and work uncertified?

Work certified has been approved by the contractee's architect or engineer. Work uncertified has been done but not yet approved, so it is shown at cost. Both are part of the work in progress picture on the contract.

How much profit should be taken on an incomplete contract?

It depends on how far the contract has progressed and what the question gives, such as cash received and work certified. Learn each rule with its conditions and apply the one that matches. Always state the rule you use in your working.

Do I need to learn AS 7 and Ind AS 115 in detail?

You should understand the principle behind them, especially stage of completion and recognising expected losses. AS 7 applies to entities following Indian GAAP (non-Ind AS), and Ind AS 115 applies to Ind AS entities. Prepare short theory points and follow the exact scope given in the ICMAI study material.