TEST- 16 [Solution] Contract Price `25,00,000. Work Certified `24,00,000

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Kory Barker
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1 Time Allowed: 1 hour 30 min. September 30, 2018 Total Marks: 50 Marks Answer to Question no.1: Sub- Contracting along with its Advantages 1. Sometimes the contractor may not find it feasible to do the entire work by his own efforts and he may entrust or delegate some portion of work to another person who is called the subcontractor and the work delegated to him is known as Sub- contract. 2. The procedure of sub-contracting is normally observed in complex projects where many specialized activities are involved and it becomes necessary to delegate some of the activities to other specialized organizations. 3. Sub contractor is accountable to the main contractor and not the contractee. 4. Advantage of Sub-contracting:- a) It leads to quick completion of contract. b) Quality is improved due to expertise of sub-contractor in their respective jobs.cost may be saved as the main contractor may find it more expansive to do the work himself. Answer to Question no.2: Inter Process Profits 1) Under the normal circumstance, the output of one process is transferred to next process is transferred to next process at cost price. In other words, no profit is added while transferring the output to the next process. 2) However, if some amount of profit is considered while transferring the output to the next process, the profit so incorporated is known as Inter- Process Profits. 3) The amount of profit which is to be considered is decided on the basis of prevailing market conditions or conditions prevailing in the particular industry. 4) Objectives of Inter- process Profits:- I. To ascertain whether the cost of production competes with the market prices. II. To enable the transferee process to stand on its own efficiency. Answer to Question no.3: Particulars Amount (`) Contract Price 25,00,000 Work Certified 24,00,000 Cash Received 21,60,000 Cost of Contract to date 19,80,000 Total Estimated Cost Cost of Contract to date 19,80,000 Add: Estimated Additional Cost 1,20,000 21,00,000 Estimated Profit Contract Price 25,00,000 Less: Estimated Additional cost (21,00,000) ` 4,00,000 Computation of amount of profit to be taken to Profit and Loss A/c under different methods Method 1 Work Certified `24,00,000 Estimated Profit = ` 4,00,000 = `3,84,000 Contract Price `25,00,000 Method 2 Method 3 TEST- 16 [Solution] Work Certified Cash Received Estimated Profit Contract Price Work Certified `24,00,000 `21,60,000 = ` 4,00,000 = ` 3,45,600 `25,00,000 `24,00,000 Cost of Contract to date Estimated Profit = ` 4,00,000 `19,80,000 = ` 3,77,143 Total Estimated Cost `21,00,000 Page No: 1.1

2 Method 4 Cost of Contract to date Cash Received Estimated Profit Total Estimated Cost Work Certified `19,80,000 `21,60,000 = ` 4,00,000 = ` 3,39,429 `21,00,000 `24,00,000 Recommendation: - On conservative basis, it is recommended to transfer the least amount (i.e. ` 3,39,429) to Profit and Loss A/c. Answer to Question no.4: Let the quantity of raw material introduced in Process I be 100 kg. The output and input in the four processes then is as follows: Particulars Process I Process II Process III Process IV Input (kg.) Less: Loss (kg.) 25% = (25) 20% = (15) 20% = (12) 16 2 %= (8) 3 Output (kg.) Thus if the end output is 40 kg. the input in Process I is 100 kg. If output of process IV is 40,000 kg. the input in Process I will be 40,000 (100/40) = 1,00,000 kg. Thus, for 1 kg. of output 2.5 kg. of materials is required. If costs of material increases or decreases by ` 1, the cost of output will increase or decrease by 100/40 = ` 2.50 per kg. Total cost of initial input for 40,000 kg. of output = 1,00,000 kg. ` 50 = ` 50,00,000 Input cost per kg. of output = ` kg. = ` 125. Answer to Question no.5: Process III A/c Particulars Units Amount (`) Units Amount (`) To Opening W.I.P. 2,000 25,750 By Normal Loss 2,500 7,500 To Process II A/c 53,000 4,11,500 By Process IV 48,000 7,19,750 To Direct Materials 1,97,600 By Closing WIP 5,000 61,500 To Direct Wages 97,600 To Production Overheads 48,800 To Abnormal Gain 500 7,500 55,500 7,88,750 55,500 7,88,750 5 Normal Loss = [Opening WIP + Units from Process II Closing WIP] = (2, ,000 5,000) = 2,500 units 100 Statement of Equivalents Production (FIFO) Units Particulars Units Material (1) Material (2) Labour Overhead In Out % Quantity % Quantity % Quantity % Quantity 2,000 Op. WIP, completed 2, ,000 Introduced and 46, , , , ,000 completed Transferred 48,000 Normal Loss 2,500 Closing WIP 5, , , , ,500 Abnormal Gain (500) 100 (500) 100 (500) 100 (500) 100 (500) 55,000 55,000 50,500 49,400 48,800 48,800 [P.T.O.] Page No: 1.2

3 Statement of Cost per unit Type of Cost Amount (`) Equivalent Units Cost per unit (`) Material (1) 4,11,500 (-) Normal loss 7,500 4,04,000 50,500 8 Material (2) 1,97,600 49,400 4 Labour 97,600 48,800 2 Overheads 48,800 48,800 1 Statement of Value of Equivalent Production Opening WIP, now completed Material (1) 8 Material (2) ,600 Labour ,600 Overhead ,000 Material (1) 46, ,68,000 Introduced and completed Material (2) 46, ,84,000 Labour 46, ,000 Overhead 46, ,000 6,90,000 Material (1) ,000 Abnormal Gain Material (2) ,000 Labour ,000 Overhead ,500 Material (1) 5, ,000 Closing WIP Material (2) 3, ,000 Labour 2, ,000 Overhead 2, ,500 61,500 Computation of Total Cost of 48,000 units transferred to Process IV 2,000 units of Opening WIP Cost already incurred 25,750 Cost now incurred 4,000 29,750 46,000 Units out of introduced units 6,90,000 7,19,750 Answer to Question no.6: Contract Account for the period of to Particulars Amount (`) Particulars Amount (`) To Material Issued 7,74,300 By Material at site c/d 75,800 To Labour (10,79, ,02,500) 11,81,500 By Material Sold 10,000 To Engineers salary (20,500 9 months 1,84,500 By Profit and Loss A/c (Loss on Sale) 3,500 To Supervisors salary (9, /4) 60,750 By Plant at site c/d 6,93,750 To Administration Expenses 4,50,600 Less: 7,71,000-50, (4,60,600 10,000) To Plant sent to site 7,71,000 By Cost of Contract To Date c/d 26,39,600 27,28,950 10,87,500 To Cost of Contract to date b/d 26,39,600 By WIP To Notional Profit c/d 2,70,300 a) Work certified 22,50,000 b) Work uncertified 6,59,900 29,09,900 29,09,900 To Profit & Loss Account 1,60,178 By Notional Profit b/d 2,70,300 To Reserve (WIP) 1,10,122 2,70,300 2,70,300 Page No: 1.3

4 Computation of Work uncertified Proportional of - Total works done = 2/3 - Work works done = 2/3 - Work uncertified = 2/3 1/2 = 1/6 Cost incurred to date on 2/3 rd contract = ` 26,39,600 Hence, proportionate cost related to 1/6 th uncertified works 26,39,600 1 = = 6,59,600 2 ` 6 3 Computation of estimated profit to be transferred to profit and loss account 2 Work Certified 2 20,00,000 = Notional Profit 2,70,300 3 Contract Price 1,60, ,50,000 ` Answer to Question no.7: Process I Account To Direct Materials 2,500 10,000 By Normal Loss To Direct Labour 6,250 By Process ` 9 2,300 20,700 To Overhead 4,500 To Abnormal ` ,550 21,200 2,550 21,200 10, , , Cost Per Kg. = = ` 9 per kg 2,500 kgs kgs. Normal loss Account To Process I A/c By Bank A/c By Abnormal Gain A/c Abnormal Gain Account To Normal Loss A/c By Process I A/c To P & L A/c (b) Statement of profit (Attributable to each of the Joint Products according to weight of output and market value of production) Output Selling price Sales Joint Cost Apportionment according to: Profit (Loss) Kg. per Unit (`) Value (`) Weight of Market value of Weight of output (`) production (`) output (`) = = = 8 A ,600 13,500 17,250 8,100 4,350 B ,400 12,000 11,500 2,400 2,900 C ,200 9,000 5,750 (1,800) 1,450 2,300 43,200 34,500 34,500 8,700 8,700 Joint Product Profit (Loss) Market value of production (`) Page No: 1.4 [P.T.O.]

5 Working Notes: (1) Joint Cost of three products under Process 2: - Transfer of output from Process I ` 20,700 Add: Direct Labour 6,900 Overhead 6,900 Total 34,500 Joint Products Output In kg. S.P. (per unit) Sales Revenue Share of Joint Costs A ,600 ` 34,500/6 3 ` 17,250 B ,400 ` 35,500/ 6 2 ` 11,500 C ,200 ` 34,500/6 1 ` 5,750 43,200 ` 34,500 (3)Apportionment of Joint Cost on the basis of weight of output Product Output (Kgs.) Share of Joint Cost A , /2,300 13,500 B , /2,300 12,000 C , /2,300 9,000 2,300 34,500 Page No: 1.5

CONTRACT COSTING. INTRODUCTION Contract or terminal costing is A form of specific order costing; attribution of costs to individual contracts.

CONTRACT COSTING. INTRODUCTION Contract or terminal costing is A form of specific order costing; attribution of costs to individual contracts. CONTRACT COSTING INTRODUCTION Contract or terminal costing is A form of specific order costing; attribution of costs to individual contracts. This method is used in case of big jobs described as contracts.