What is Contract Costing? – Definition
Contract costing is the method of costing which is applied in a business where separate contracts of non-repetitive nature are undertaken. According to Sharie, “Contract or terminal cost accounts are applicable to a concern which makes specific contracts and requires to know the cost of each.”
A contract is a job of large size may extend even beyond one accounting period. The person executing the contract is known as a Contractor and the person for whom it is executed is known as Contractee.
Features of Contract Costing
The main features of Contract Costing may be summarised as follows:
- Contracts are executed at contract site away from executor’s or contractor’s premises.
- Contracts are jobs of large size and may continue over more than one accounting period.
- Each contract is treated as a separate unit of cost for the purpose of cost ascertainment.
- The contracts are executed as per the specifications given by the contractee.
- Since the work is executed at the contract site, most of the items of cost to be incurred are direct in nature.
- The contract is executed by the contractor for some agreed amount of consideration known as Contract Price.
- The payments by the contractee are made to the contractor in installments on the basis of the extent of the work already completed by him and certified as complete by contractee’s engineer or architect.
Contract costing is most suitable to ship-building, road construction, building construction, civil engineering works, etc.
Difference between Contract Costing, Job Costing and Terminal Costing
Contract Costing, Job Costing and Terminal Costing do not differ from each other so far as the nature of the work involved is concerned. But contract costing differs from job costing in as much as a contract is executed at the site outside the factory premises of the contractor, whereas a job is executed by the contractor inside his factory premises.
Moreover, the ascertainment of the cost of a contract is very simple as compared to the ascertainment of the cost of a job. A contract is executed at the site of the contract outside the factory premises and as such most of the expenses incurred by the contractor in its execution are direct in nature. A job is performed inside the factory premises where a number of different jobs are completed simultaneously and a number of items of indirect expenses have to be apportioned to these jobs on some equitable basis.
Contract costing and job costing differ slightly from terminal costing as in case of terminal costing a deadline is fixed by the contractee within which a job or contract must be completed failing which the contractor shall pay damages to the contractee on account of loss suffered by him due to the delay in the completion of the job or contract.
Objects of Contract Costing
The main objects of Contract Costing are:
(i) to ascertain the total cost of a contract, and
(ii) to ascertain the profit or loss on the contract.
Procedure of Contract Costing
A contractor maintains a Contract Ledger in which a separate account is opened for each contract undertaken by him. The Contract Ledger should be ruled out as to give maximum information.
A specimen ruling of the Contract Ledger is given below: