Question

Task 2 Scenario Mega construction Plc, are contractors for replacement of a high technology factory for a multinational company. The total value of the contract is £ 3,500,000 over a three year period. The contract commenced on 1st March 2011, & the following details are available as at 28th February 2012

Material purchases		65,000
Material transfers in from other site		28,000
Material transfer out to another site.		5,000
Material on site, not yet used		28,000
Direct labour		29,000
Direct labour accrued		3,500
Indirect labour		5,000
Indirect labour accrued		1,800
Plant delivered to site		60,000
Hire of equipment’s		27,000
Hire charges owing		8,400
Head office charges		58,000
Cost of work yet not certified		27,000

Mega Construction Plc, have received payment of £ 540,000 which represent work certified as
completed by architects as at 28 February 2011, less a 15% retention.

The company takes credits for three fourth of the profits on work certified (less retention). The
plant is estimated to last the life of the contract, & no residual value is expected.

2.1 Explain the principle of contract costing in construction industry.
2.2 Calculate the attributable profit/ loss & value of work certified.
2.3 Prepare contract cost statement for Mega Construction Plc. (40 marks

Answer 1

Answer:
2.1 Principle of contract costing: Contract costing is a type of job costing in which contract constitutes a unit of cost.
When contract costing is applied a separate no is given to each contract.costs are accumulated for each contract.
This costing is used by companies engaged in building construction, civil engineering works and related works.
The nature of expenses of contract costing is mainly consists of direct costs. The indirect costs mainly related to office and
administrative costs. All direct costs like cost of material, direct labour etc are debited to contract account.
If a plant is used for the contract approriate depreciation value should be debited to the contract account.
If a contract extends to more than one year the outstanding expenses relating to the accounting year debited to the contract account.
The Contract account is credited with work certified and uncertified but completed.
The difference between the debit and credit siteresults in notional profit or loss. In case of loss the entire amount of loss is transferred to the
profit and loss account but in case of profit only a part is transferred to profit and loss account.
2.2
Value of Work Cerified
	Amount
Payment received at the end of the first year which is 15% less than the value certified.	540,000.00
Hence, The value of work certified ( 540000/85*100)	635,294.12
2.3 : Contract Cost Statement
Statement of Contract Account No….
Particulars	amount	Particulars	amount
To Material Purchased	65000.00	By Material at site	28000.00
To Material from other site	28000.00	By material transferred to another site	5000.00
To Direct Labour	29000.00	By Work certified	635294.12
To Direct labour accrued	3500.00	By Cost of Work not certified	27000.00
To Hire of equipments	27000.00
To Hire charges owing	8400.00
To depreciation (60000/3)	20000.00
To Balance C/d ( Notional Profit)	514394.12
	695294.12		695294.12
Note : As the life of the plant is 3 years with no residual value,
the depreciation is 1/3rd of plant value of 60000.
2.2
Attributable Profit & Loss	Amount
Value of Notional Profit	514394.12
Less : Cost of work not certified	27000.00
value of Notional Profit on Work Certified	487394.12
Less: Value of retention ( 635294.12-540000)	95294.12
value of Notional Profit on Work Certified ( less retention)	392100.00
As the company takes credits for 3/4 of the profits on work certified ( less retention), the value of attributable profit will be 3/4 of 412100	294075