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What is the accounting treatment for costs in contract costing?
Accounting treatment for costs is explained below −
Debited from the contract account.
Charged to the contract account.
Bigger the job/control, difficult to control the costs (material, damage, labour, supervision, equipment usage etc)
In this type of work, an engineer will be appointed to inspect the work and based on that an inspection engineer will give a certificate stating completion of work.
Later on, based on that the certificate payments are made.
Some part of the money will be released after certification. Some part of money will be retained by the contractee, which will be released after total completion of work. The money kept by the contractee is called retention money.
|8||Work in progress|
Value of Work certified + work appearing in contract account.
The estimated formulae are as follows and the respective abbreviations are explained below −
EP * (WC/CP)
EP * (WC/CP)*(CR/WC) or EP * (CR/CP)
EP * (Cw/Etc)
(if EP is not available then NP is used)
The abbreviations are as follows −
- EP = Estimated profit
- WC= work certified
- CP = contract price
- CR = cash received
- CR = cash received
- Etc= estimated total cost
- NP = notional profit
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