CONTRACT COSTING – AN OVERVIEW:
Contract costing is another important form of job order costing. This type of costing can be applied to those jobs/orders which are undertaken according to the customer’s requirement but the duration of each work or job is long as compared to job costing. So, the only difference between a job costing and a contract costing is that of size.
The work to be executed depends upon the customer’s specification and is performed at the site. The work is generally of constructions or repair nature. It covers activities like the construction of dams, bridges, road, buildings etc.
FEATURES OF CONTRACT COSTING:
The main distinguishing features of contract costing include the following:
- Each contract is a separate cost unit
- Items of expenses can be directly identified with contract and treated as direct expenses, though indirect. So direct expenses are high in proportion.
- Payment of price depends upon the stage of completion of work.
- Any surplus material will either be credited at the end of contact and if material is transferred to new contract; it will be debited to new contract.
- The size of site and long duration of contract will makes the cost control relating to material usage , labour utilization etc. difficult.
JOB COSTING VS CONTACT COSTING:
Although job and contract costing are similar to each other in certain aspects but there are certain differences also, which are as under:
- Size: In case of job order, the size of job is small but in contract costing the size is comparatively large.
- Place of work: In job costing, work is performed in workshops whereas in case of batch costing the work is generally done on sites.
- Nature of expense: The expenses can be of direct and indirect nature in job costing but most of expenses are generally of direct nature under contract costing.
- Payment of price: The selling price is paid in full after the job is completed under job costing whereas the payment is made in installment depending upon the work completed in case of contract costing.
TYPES OF CONTRACTS:
The contracts are of the following three types:
- Fixed price contract: Under this both the parties agree to a fixed contract price.
- Fixed price contract subject to escalation clause: Under this a clause is provided in the contract to cover up any change in the price of contract due to change in price of raw material or other factors of production.
- Cost plus contract: Under this type of contract, no such fixed price is settled. The company is reimbursed for the costs it incurred, plus a percentage profit or fixed profit.