What is Contract Costing?
Contract Costing
1. Definition
Contract Costing is a method of cost accounting used to ascertain the cost of specific contracts, especially in industries where work is done under contracts extending over a long period, such as construction, shipbuilding, engineering, and large-scale manufacturing.
It involves tracking and analyzing costs related to a particular contract or project separately, to determine profitability and monitor expenses effectively.
2. Purpose of Contract Costing
To ascertain the actual cost incurred on a particular contract.
To control costs by identifying where expenses are high.
To determine the profit or loss on each contract.
To provide information for future contract bidding and pricing.
3. Features of Contract Costing
| Feature | Explanation |
|---|---|
| Specific Contract Focus | Costs are recorded and analyzed for each contract separately. |
| Long-term Projects | Suited for contracts spanning months or years. |
| Cost Categories | Includes materials, labor, plant, and overheads related to the contract. |
| Progressive Cost Recording | Costs are recorded as they are incurred during the contract. |
| Work-in-Progress Valuation | Partially completed contracts require valuation of work done at intervals. |
| Profit Recognition | Profit is often recognized on percentage of completion basis. |
4. Types of Costs Included
Direct Materials: Raw materials used in the contract.
Direct Labor: Wages paid to workers engaged in the contract.
Direct Expenses: Costs directly attributable to the contract, such as site expenses.
Overheads: A fair share of indirect costs allocated to the contract.
5. Contract Costing Process
Identification of Contract: Each contract is treated as a separate cost unit.
Collection of Costs: All relevant costs are recorded and attributed to the contract.
Valuation of Work-in-Progress: Based on the degree of completion.
Cost Control: Comparing estimated vs actual costs.
Profit Calculation: Deducting total costs from contract revenue.
6. Relevant Case Law
State of Haryana v. Chanan Singh (1988)
The Supreme Court emphasized the importance of maintaining separate accounts for contract costing.
It was held that proper cost accounting records for contracts are crucial for transparency and avoiding disputes.
The case involved government contracts where cost overruns were disputed, and the court upheld the need for accurate contract costing to resolve such issues.
7. Importance of Contract Costing
Helps in accurate billing of clients.
Assists in monitoring progress and costs during long contracts.
Enables businesses to identify loss-making contracts early.
Provides data for decision-making regarding pricing and future contracts.
8. Summary
| Aspect | Details |
|---|---|
| What it is | Cost accounting method for specific contracts |
| Where used | Construction, engineering, shipbuilding |
| Costs included | Direct materials, labor, expenses, overheads |
| Profit recognition | Often based on percentage completion |
| Case law example | State of Haryana v. Chanan Singh (1988) |
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