PROF. BHAMBWANI’S
RELIABLE CLASSES
QUESTIONS OF RECORDED LECTURES
CONTRACT COSTING
LEC 1:
THEORY
LEC 2:
M/s. Hind Corporation undertook a contract for erection of a sewerage treatment plant for MumbaiMunicipality for a total value of Rs.24,00,000. It was estimated that the job would be completed by 31st January,1998.
You are instructed to prepare the contract Account for the year ending 31st January, 1998 from the following particulars:
1MaterialsRs.3,00,000
2WagesRs.6,00,000
3Overhead chargesRs.1,20,000
4Special plant2,00,000
5Work certified was forRs.15,00,000 & 80 per cent of the same was received in cash
6Materials lying on site as on 31.1.1998 Rs.40,000
7Depreciate plant by 10 per cent.
85 % of the value of material issued and 6 % of wages may be taken to have been incurred for the portion of work completed but not yet certified. Overheads are charged as a percentage of direct wages.
9.Ignore depreciation of plant for use of uncertified portion of the work.
10.Fine of Rs.10,000 is likely to be imposed for late completion of the contract.
11.Ascertain the amount to be transferred to Profit & Loss Account on the basis of realised Profit.
LEC 3:
A contractor, who prepares his account on 31st December each year, commenced a contract on 1st April, 1997. The costing records concerning the said contract reveal the following information on 31st December, 1997:
Rs.Materials charged to site / 2,58,100
Labour engaged / 5,60,500
Foremen’s salary / 79,300
Plants costing Rs.2,60,000 had been on site for 146 days. Their working life is estimated at 7 years and their final scrap value at Rs.15,000. A supervisor, who is paid Rs.4,000 p.m., has devoted approximately three-fourths of his time to this contract. The administrative and other expenses amount to Rs.1,40,000. Materials in hand at site on 31st December, 1997 cost Rs.25,400. Some of the material costing Rs.4,500 was found unsuitable and was sold for Rs.4,000 and a part of the plant costing Rs.5,500 (on 31.12.97) unsuited to the contract was sold at a profit of Rs.1,000.
The contract price was Rs.22,00,000 but it was accepted by the contractor for Rs.20,00,000. On 31st December, 1997, two-thirds of the contract was completed. Architect’s certificate had been issued covering 50% of the contract price and Rs.7,50,000 had so far been paid on account. Prepare contract account and state how much profit or loss should be included in the financial accounts to 31st December, 1997. Workings should be clearly given. Depreciation is charged on time basis.
Also prepare the Contractor’s account and show how these accounts would appear in the Balance Sheet as on 31st December, 1997.
LEC 4:
N Limited has undertaken three contracts. It furnished the following information for the year ended 31st March, 1997. (Figures in’000s)
Contract A (Rs.) / Contract B (Rs.) / Contract C (Rs.)1. / Balances as on 1-4-1996
Material at site Uncertified work / 200
4,500 / 2,000
4,000 / -
-
Plant at Site / 2,200 / 3,100 / -
Work Certified / 19,500 / 1,400 / -
Provisions for contingencies / 1,000 / 600 / -
2. / Transactions During the year
Material Issued / - / 6,200 / 8,000
Wages / - / 2,800 / 3,000
Subcontract Charges (gross) / - / 11,000 / 9,000
3. / Balances on 31.3.1997
Material at site / - / 1,000 / 800
Uncertified Work / - / 1,000 / 3,850
Plant at Site / - / 2,000 / -
Work Certified / 25,000 / 40,000 / 18,000
4. / Contract price / 25,000 / 60,000 / 50,000
5. / % age of Amount Received / 100% / 90% / 80%
Additional Information:
1.Subcontract charges are subject to 10% retention money & 2% income tax deducted at source, which is paid to Govt. Treasury on 2.4.97.
2.The company has the policy of taking credit for the contract profit considering the proportion of certified work and the amounts received to the contract price.
You are required to prepare:
a.The respective contract accounts for the year ended 31st March, 1997.
- Relevant extracts of the Balance Sheet as at 31.3.97.
LEC 5:
The following Trial Balance was extracted as on 31st Dec.,1997 from the books of Sterling contractors:
Rs. / Rs.Capital / 3,76,800
Provision for depreciation of machinery / 63,000
Cash received on account of Contract 107 / 12,80,000
Creditors / 81,200
Land & Building (cost) / 74,000
Machinery(cost) / 52,000
Bank / 45,000
Contract 107:
Materials / 6,00,000
Direct Labour / 8,30,000
Expenses / 40,000
Machinery on site(cost) / 1,60,000
18,01,000 / 18,01,000
Contract 107 was started on 1st January 1997.The contract Price was Rs. 24,00,000 and the customer has so far paid Rs.12,80,000 being 80% of the work certified on 15th Dec. 97.
The cost of the work done since certification is Materials: 8,000; Labour Rs.5,000; Overheads : Rs.3,000.
On 31st Dec.,1997 after the above Trial Balance was extracted, machinery costing Rs.32,000 was returned to stores and materials then on site were value date Rs.27,000.
Provision is required to be made for direct labour due Rs.6,000 and for depreciation of all machinery at 12-1/2% on cost and 2% on Land and Building on cost.
You are required to prepare:
a.The contract account for contract 107,giving a statement of profit, if any, to be properly credited to profit and loss account for 1997.
b.General Profit & Loss Account and
c.The Balance Sheet of Sterling contractors as on 31st Dec.,1997.
LEC 6:
The following Trial balance was extracted from the books of Apollo Contractors as on 31st Dec.,1997.
Rs. / Rs.Contractees Account / 3,00,000
Buildings / 1,00,000
Creditors / 62,000
Bank / 35,000
Capital Account / 3,00,000
Materials / 1,00,000
Wages / 70,000
Expenses / 37,000
Plant / 2,50,000
Work in progress (contract No.837) 1.1.1997 / 1,00,000
Unadjusted Profit / 30,000
6,92,000 / 6,92,000
Contract No.837 which was in progress on 1st January,1997 was completed on 31st March, 1997. Contract no.838 commenced on 1st January,1997.
Rs,20,000 Materials and Rs.10,000 Wages were paid for contract No.837. Rs.60,000 materials were sent to contract No.838 site, but Rs.3,000 worth was lost there by accident. Rs.60,000 wages paid for contract 838. Rs.50,000 plant was used for Contract 838 all through but plant costing Rs.2,00,000 was used for Contract No. 837 and thereafter it was sent to Contract No. 838. Rs.4,000 materials were at site on Contract No.838 at the end of the year. Provide 10% depreciation on the Plant and 2% on Buildings.
Contract No 837 was for Rs.1,50,000 and certified work up to last year was Rs.1,00,000. The work has been certified upto the full extent but payment has been received upto 80% of the certified amount. The balance has not been paid yet nor any entry has been passed, on completion of the contract.
Expenses are charged to contracts on the basis of 50% of direct wages. The new contract is for Rs.4,00,000 90% is paid on certification. The uncertified work of contracts as on 31st Dec.,1997,is estimated at Rs.15,030.
You are required to prepare:
a)Contract Accounts. b)Contractee Accounts
c)Profit & Loss A/c for 1997 d)Balance sheet as on 31st Dec.,1997.
LEC 7:
ESTIMATED THEORY
LEC 8:
A contractor secured a contract to supply and erect machinery for the sum of Rs.7,50,000.He was to receive payments on account from time to time equal to 90% of the certified value of the work done.
He commenced work on 1st January,1997 & incurred the following expenditure during the year. Plant and tools Rs.70,000;Machinery and stores Rs.2,00,000;Wages Rs.1,50,000; Sundry Expenses Rs.30,000;and Establishment charges Rs.40,000.
A part of the machinery costing Rs.20,000 was unsuited to the contract and was immediately sold at a profit of Rs.5,000
The value of plant and tools on 31st Dec.,1997 was Rs.40,000 & the value of Machinery & Stores then in hand was Rs.30,000
By 31st January,1998 he had received payments on account to Rs.4,38,750 being 90% of the certified value of work done upto 31st Dec.,1997.
In order to calculate the profit made on the contract upto 31st Dec.,1997 the contractor estimated the further expenditure that would be incurred in completing the contract and took to the credit of Profit and Loss A/c for the year that proportion of the estimated net profit to be realised on contract which the certified value of the work done bore to the contract price. He estimated:
a.That the contract would be completed in a further period of six months.
b.That plant and tools would have a residual value of Rs.10,000 upon the completion of the contract.
c.That the cost of machinery and stores required in addition to those in stock on 31st Dec.,1997 would be Rs.1,00,000 and that further sundry expenses of Rs.20,000 would be incurred.
d.That the wages on the contract for the six months upto 30th June,1998 would amount to Rs.80,000.
e.That the establishment would cost the same sum per month as in the previous year.
f.That 2-1/2% of the total cost of the contract (excluding this percentage) should be provided for contingencies. {Also do if 2 1/2% of cost (including this percentage)}
Prepare the contract Account for the year ended 31st Dec.,1997 and show your calculations of the profit to be credited to Profit and Loss Account for the year.
LEC 9:
A construction company undertaking a number of contracts furnished the following data relating to its uncompleted contracts as on 31st March, 1998:-
(Rs. in lacs)Contract Numbers
723 / 726 / 729 / 731
Total Contract Price
/ 23.20 / 14.40 / 10.08 / 28.80Estimated Costs on completion of contract / 20.50 / 11.52 / 12.60 / 21.60
Expenses for the year ended 31.3.98:
Direct Materials
/ 5.22 / 1.80 / 1.98 / 0.80Direct Wages / 2.32 / 4.32 / 3.90 / 2.16
Overheads (Excluding Depreciation) / 1.06 / 2.60 / 2.62 / 1.05
Profit Reserve as on 1.4.97 / 0.75 / - / - / -
Plant issued at Cost / 5.00 / 3.50 / 2.75 / 3.00
Materials at Site on 1.4.97 / 0.75 / - / - / -
Materials at Site on 31.3.98
/ 0.45 / 0.20 / 0.08 / 0.05Work Certified till 31.3.97 / 4.65 / - / - / -
Work Certified during the year 1997-98
/ 12.76 / 13.26 / 7.56 / 4.32Work Uncertified as on 31.3.98 / 0.84 / 0.24 / 0.14 / 0.18
Progress payments received during the year / 9.57 / 9.00 / 5.75 / 3.60
Depreciation @ 20% per annum is to be charged on plant issued. While the Contract No. 723 was carried over from last year, the remaining contracts were started in the 1st week of April, 1997. Required:
(i)Determine the profit/loss in respect of each contract for the year ended 31st March, 1998.
(ii)State the profit/loss to be carried to Profit & Loss A/c. for the year ended 31st March, 1998.
LEC 10:
M/s. Sanjay construction Ltd. obtained a contract to build a fly over at Jabalpur, at contract price of Rs.50,00,000/- The work commenced on 14-7-96 and total cost of work completed upto 31-12-96 amounted to Rs.19,20,000 and a sum of Rs.1,00,000 was on that date credited to Profit & Loss Account in respect of the contract. The other items on that date relating to this contract were as follows.
ParticularsRs.
Work certified20,00,000
Work uncertified3,20,000
Materials at site20,000
Plant at site1,80,000
Outstanding wages10,000
Cash received being 75% of work certified15,00,000
During the year 1997 the following expenditure were incurred on the contract.
ParticularsRs.
Materials6,00,000
Wages paid14,90,000
Administration charges30,000
Plant1,00,000
Sundry expenses40,000
During the year, Materials of Rs.1,00,000 was found unsuitable and was sold for Rs.1,05,000. The value of plant & materials on 31-12-97 was Rs. 2,00,000 & Rs.70,000 respectively. Cost of work uncertified was Rs.2,50,000 & cash received from contractoree was Rs.18,00,000 during the year.
It was estimated that contract would be completed by 31st January, 1998 requiring further expenditure of Rs.1,50,000 (Materials Rs.35,000 wages, Rs.1,10,000 & Administrative expenses Rs.5,000). The value of plant & materials at the end of the contract would be Rs.180,000 & 45,000 respectively.
Prepare contract account for the year ended 31st December, 1997 and show your calculations for determining the amount to be taken to the credit of Profit & Loss Account for the year 1997.
LEC 11:
Mohanlal Engineering Company undertakes long term contract which involves the fabrication of prestressed concrete blocks and the erection of the same on consumers site.
The following information is supplied regarding the contract which is incomplete on 31st March, 1999.
Rs.Costs incurred:
Fabrication costs to date
Direct Materials / 2,80,000
Direct Labour / 90,000
Overheads / 75,000
4,45,000
Erection cost to date / 15,000
Total / 4,60,000
Contract price / 8,19,000
Cash received on account / 6,00,000
Technical estimate of work completed to date.
Fabrication :
Direct materials 80%
Direct Labour and Overheads 75%
Erection 25%
You are required to prepare a statement for submission to the management indicating :
(a)the estimated profit on the completion of the contract, and
(b)the estimated profit to date on the contract.
LEC 12:
ESCALATION THEORY
LEC 13:
Deluxe Limited undertook a contract for Rs. 5,00,000 on 1st July, 1997. On 30th June, 1998 when the accounts were closed, the following details about the contract were gathered:
Rs.Materials Purchased / 1,00,000
Wages Paid / 45,000
General Expenses / 10,000
Plant Purchased / 50,000
Materials on hand 30-6-98 / 25,000
Wages Accrued 30-6-98 / 5,000
Work Certified / 2,00,000
Cash Received / 1,50,000
Work Uncertified / 15,000
Depreciation of Plant / 5,000
The above contract contained an escalator clause which read as follows:-
“In the event of prices of materials and rates of wages increase by more than 5% the contract price would be increased accordingly by 25% of the rise in the cost of materials and wages beyond 5% in each case.”
It was found that since the date of signing the agreement the prices of materials and wage rates increased by 25%. The value of the work certified does not take into account the effect of the above clause.
Prepare the contract account. Workings should form part of the answer.
LEC 14:
A contract for construction of building is governed by an escalation clause in respect of prices of steel, cement and stone aggregate. The prices ruling on the date of tender for the building and the actual prices paid by the contractor were as follows:
On the date of tender / Actual(Rs.) / (Rs.)
Steel per ton / 610 / 675
Cement per ton / 100 / 105
Stone aggregate per 100 c.ft. / 40 / 38
3,00,000c.ft. reinforced cement concrete was laid in the building. If 100 lbs. of steel, 2,400 lbs. of cement and 90 c.ft. stone are the net quantities required to cast 100 c.ft. of RCC and the wastages an 5,3 and 10 percent respectively. Calculate the difference in selling price according to the escalation clause
(1 ton = 2,240 lbs). (Assume the wastage percentage based on the net quantity of material).
LEC 15:
One of the building contracts currently engaged in by a construction company commenced 15 months ago and remain unfinished. The following information relating to the work on the contract has been prepared for the year just ended:-
Rs.’000
Contract Price / 2,500Value of work certified at the end of year / 2,200
Cost of work not yet certified at the end of year / 40
Costs incurred::
Opening balances:
Cost of work completed / 300
Materials on site (physical stock) / 10
During the year:-
Materials delivered to site / 610
Wages / 580
Hire of plant / 110
Other Expenses / 90
Closing Balance:
Materials on site(physical stock) / 20
As soon as materials are delivered to the site, they are charged to the contract account. A record is also kept of materials as they are actually used on the contract. Periodically a stock check is made and any discrepancy between book stock and physical stock is transferred to a general contract material discrepancy account. This is absorbed back to each contract, currently at the rate of 0.5% of materials booked. The stock check at the year end revealed a stock shortage of Rs.5,000.
In addition to the direct charges listed above, general overheads are charged to contracts at 5% of the value of work certified. General overheads of Rs.15,000 had been absorbed into the cost of work completed at the beginning of the year.
It has been estimated that further costs to complete the contract will be Rs.2,20,000. This estimate includes the cost of materials on site at the end of the year just finished and also a provision for rectification.
Required:
(a)Determine the profitability of the above contract and recommend how much profit (to the nearest Rs.’000) should be taken for the year just ended.(Provide a detailed schedule of costs.)
(b)State how your recommendation in (a) would be affected if the contract price was Rs.40,00,000(rather than Rs.25,00,000) and if no estimate has been made of costs to completion. (If required suitable assumption should be made by the candidate).
LEC 16:
Canal Builders Ltd. Undertook a contract to construct 500 Kilometre long canal having a width of 100 metres and a depth of 20 metres. The time allowed for canal construction was 36 months. The contract was for Rs.200 crores.
Work on canal commenced on 1st December, 1994. The following table summarises expenses incurred during the respective period:
1-12-94 to31-3-95 / 1-4-95 to
31-3-96 / 1-4-96 to
31-3-97 / 1-4-97 to completion on 31-1-98
Amount in crores / Rs. / Rs. / Rs. / Rs.
Wages on excavation and
removal of soil / 3.0 / 10.0 / 15.0 / 10.0
Transportation charges / 0.5 / 2.0 / 3.0 / 2.0
Landed cost of cement
Consumed / - / 10.0 / 20.0 / 40.0
Masonry / - / - / 1.0 / 2.0
Rental of equipment / 1.5 / 4.5 / 5.5 / 4.5
Supervision cost / 0.8 / 2.5 / 3.0 / 3.0
5.8 / 29.0 / 47.5 / 86.5
Penalty for delay / - / - / - / 1.2
Extent of work certified / Nil /
Nil
/ 25% / 100%% of cash received to
work certified / - / - / 50% / 80%
10% of the contract price is receivable 12 months after completion ; 5% is receivable 24 months after completion; balance 5% is receivable 36 months after completion of construction. This delay is to ensure satisfactory performance. It is anticipated that post completion expenditure would be Rs.4 crores to ensure rectification of defects if any.
Prepare Canal construction contract account for the period 1-12-1994 to 31-1-1998 and contractees A/c till final receipt.