What is contract costing?

Contract costing is one of the methods of job costing and it is also called terminal costing. In this, each contract is given a number and the records are maintained separately. This method is generally used by builders, construction firms, contractors etc. The main objective of this method is to identify cost and profit of each unit separately.

Chartered institute of management accountants (CIMA) defines contract costing as “That form of specific order costing, which applies where the work is undertaken as per the special requirements of customers and each order is of long term duration”.

Chartered institute of management accountants (CIMA) defines contract cost as “The aggregated costs relative to a single contract designated a cost unit”.

Features

The features of contract costing are as follows −

• Contract is taken according to the special requirements of customers.

• Long duration.

• Contract is undertaken at the customer site only.

• Consists of construction activities (mainly).

• Specific order costing principles are applied.

• Contract size is usually large.

• Each contract is independent from another.

• Specific number is assigned to each job/contract.

• Separate accounts are maintained for each job/contract.

• Based on the stage of completion, profit or loss is transferred to the profit and loss account.

• No under and over absorption of overhead problems.

• Sub-contractors may be appointed by contracts to execute work.

• If there is any exchange of materials, plants etc. respective entries are made in their accounts.

Types

The types of contract costing are explained below −

Cost plus contract − Value of contract is identified by adding fixed profit margin to total cost.

Fixed price contract − In this, both contractor and contractee agree to a fixed contract price.