Understanding Contract Costing Solutions

Aug 25, 2024

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Lecture on Contract Costing Problems

Introduction

  • The lecture focuses on solving problems related to contract costing.
  • Emphasizes the importance of understanding the theoretical aspects before tackling problems.
  • Encourages students to review the theory of contract costing in previous videos to grasp problems better.
  • Suggests students have a hard copy of problems available via a provided link.

Key Concepts in Contract Costing

  • Work in Progress: Contracts may not be fully completed within a year, leading to work in progress.
  • Notional Profit: Part of the profit calculated that is not actual; used to determine profit transferred to accounts.
  • Profit Transfer Rules:
    • If work completed is ≤ 25%, no profit is transferred to the profit and loss (P&L) account.
    • If work is > 25% but < 50%, use: 1/3 of notional profit × percentage of cash received.
    • If work is > 50%, use: 2/3 of notional profit × percentage of cash received.

Problem Solving Examples

Problem 1

  • Given:
    • Contract cost: ₹2,80,000
    • Contract value: ₹5,00,000
    • Cash received: ₹2,70,000
    • Work uncertified: ₹30,000
    • Deduction from bills: 10% retention
  • Solution Approach:
    • Calculate work certified from cash received.
    • Determine work in progress (certified + uncertified).
    • Compute notional profit = work in progress - contract cost.
    • Calculate percentage of work completed.
    • Determine profit to transfer to P&L using the appropriate formula.

Problem 2

  • Given:
    • Contract price: ₹16,00,000
    • Cash received: ₹4,90,000 (70% of work certified)
    • Work uncertified: ₹16,000
    • Total expenditure: ₹6,40,000
  • Solution Approach:
    • Calculate work certified.
    • Determine work in progress.
    • Compute notional profit.
    • Calculate percentage of work completed.
    • Apply formula for profit transfer to P&L.

Problem 3

  • Given:
    • Contract price: ₹25,00,000
    • Cash received: ₹12,00,000 (80% of work certified)
    • Work uncertified: ₹50,000
    • Expenditure (including stock): ₹10,00,000
    • Closing stock: ₹40,000
  • Solution Approach:
    • Calculate work certified.
    • Adjust expenditure for closing stock to find contract cost.
    • Compute notional profit.
    • Calculate work completion percentage.
    • Use formula for profit transfer to P&L.

Problem 4

  • Given:
    • Expenditure to date: ₹85,000
    • Further expenditure: ₹17,000
    • Contract price: ₹1,53,000
    • Work certified: ₹1,00,000
    • Work uncertified: ₹8,000
    • Cash received: ₹81,600
  • Solution Approach:
    • Determine notional profit.
    • Use specified rules for profit transfer since work is 80% complete.

Problem 5

  • Given:
    • Expenditure to date: ₹4,86,000
    • Work certified: ₹5,25,000
    • Work uncertified: ₹15,000
    • Future expenditure: ₹1,00,000 (estimated)
    • Contingency: 2% of contract price
    • Contract price: ₹7,00,000
  • Solution Approach:
    • Calculate total estimated expenditure (including future and contingency).
    • Determine estimated profit.
    • Apply formula for profit transfer since contract is almost complete.

Conclusion

  • Reviewed the methodology for solving contract costing problems.
  • Emphasized understanding rules for profit transfer based on work completion percentages.
  • Provided examples of calculating notional profit and transferring to P&L accounts.

These notes cover the key points from the lecture on contract costing problems, including the conceptual background and step-by-step processes for solving typical problems encountered in this area.