Top 14 Contract Costing Problems and Solutions

Contract costing is an agreement between contractor and contractee that the contractor will complete work specified in the contract in a given period for a certain sum of amount.

contract costing problems and solutions
contract costing problems and solutions

Contract Costing: Questions and Solutions

1. What do you mean by Contract?

Under the contract, a specified work is performed in a stipulated period at a specific rate.

2. What is a Contract?

It is a method of cost accounting to ascertain the cost of a contract and the profit earned or loss suffered thereupon.

3. What is meant by Batch Costing?

Batch costing is a specific order costing under which each batch is treated as a cost unit and costs are accumulated and calculated separately for each batch.

4. What is meant by Sub-Contract?

When a contractor assigns a portion of the contract to any other person for the completion of that portion it is known as a subcontract.

5. What is meant by Subcontract Cost?

Payment made to the sub-contract is considered a direct expense and shown on the debit side of the contract account the amount paid to the subcontractor is considered as subcontract cost.

6. What do you mean by a Cost-plus contract?

The contract price is determined by adding a certain percentage of profit or a certain amount of profit to the actual cost.

7. What is meant by retention money in contract costing?

In the case of the incomplete contractor to contractor rest of the amount is known as retention money.

8. Explain the escalation clause in the context of contract costing?

Answer: It provides a shield to a contractor that the contract price will change in proportion to the change in the price of material labor and other expenses.

9. How will you value the work in progress with reference to the contract?

The amount of work in progress is ascertained as follows:

Work certified + work uncertified Reserve Amount received.

10. Give two reasons for making a reserve for Unrealized Profit?

The reasons for making a reserve for unrealized profit are:

To meet any unforeseen future expenses.

11. How work-in-progress is shown on the Balance sheet?

Work-in-progress has always a debit balance, Hence the balance sheet under the head current Assets, loans, and Advances.

12. State the meaning of the Job Costing method and give 4 Examples.

Job costing is a method to ascertain the cost of a product or service of required by the customer job costing organization is known for jobbing type industries that manufacture goods against the order of the customer example: the printing press, repairing units, machine tools manufacturing, furniture industries.

13. What are the Salient Features of Contract Costing?

  1. Generally, its period exceeds more than one year.
  2. The contractor mat gets the work done by a subcontractor.
  3. In case of a huge amount, payment may be made in installments.

14. Why should Profit be taken into account on an Incomplete contract?

Profit on incomplete contract should be recognized due to the following reasons:

  • Profit on contracts that last for two to three years does not result in the last year so profit should unnecessary.
  • Profit on incomplete contracts is determined in a very conservation manner as only 1/3 or 2/3rd of profit is carried. It is further reduced in proportion to cash received to work certified no profit is recognized for work uncertified though work is completed profit is recognized only if at least 25% or more work is completed.
Scroll to Top