Unit- IV :Contract & Operating Costing

Problem no.1
The following was the expenditures on the contract for Rs.12,00,000 come in January.

Particular Rs.

Material 2, 40,000

Wages 3, 28,000

Plant 40,000

Overhead 17,200

Cash received on account of the contract up to 31st Dec was Rs.4, 80,000 being 80% of work
certified. The value of material in hand was Rs.20, 000. The plant had undergone 20%
depreciation. Prepare contract A/c.

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Problem no.2
A firm of a business carrying out large contract , kept in a contract ledger separate account of
each contract. The following particular relate to the certain contract carried out during the
year ended 30th June.

Particular Rs.
Work certified by Architecture 1,43,000
Cash received 1,30,000
Material sent to site 64,500
Labour 54,800
Plant installed at site 11,300
th
Value of plant on 30 June 8,200
Cost of work no yet certified (uncertified work) 3,400
Cost of work no yet certified (uncertified work) 3,400
Establishment charge 3,250
Direct expenses 2,400
Wages due 1,800
Material closing balance 1,400
Material return to store 400
Direct exp. due 200
Contract price 2,00,000
You are required to prepare Profit & loss A/c for the year ended 30th June

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UNIT-IV Cost A/C CBCS- (MBA-II Sem.) By Prof. Yogesh Dhoke Page 1
Problem no.3
Jain & co. obtain a contract for the building of an office for Rs.3, 00,000.Building operation
stared on 1st April 2009 and end at the financial year 31st March 2010. They received from
the party a sum of Rs.1,20,000 being 80% of amount certified. The following additional
information is available for the books and company.

Particular Amount

Store incurred to contract 60,000

Store in hand at 31st March 2010 5,000

Wages paid 82,000

Plant for the contract work 10,000

Depreciate plant by 10%

You are required to prepare an account showing profit for contract up to 31st March
2010 also discuss whether Jain & co. would be justified full amount of the profit of their
Profit & Loss A/c.

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Problem no.4
The following information relate to the contract of X Ltd. in 2010.

Particular Contract A Contract B

Material sent to site 1, 70,698 1, 46,534

Labour 1, 48,750 1, 37,046

Plant 30,000 25,000

Direct exp. 6,334 5,718

Establishment charges 8,252 7,704

Material return to store 1,098 1,264

Work certified 3, 90,000 2, 90,000

Work uncertified 9,000 6,000

Material at site (31st Dec 2010) 3,766 3,472

Wages due (31st Dec 2010) 4,800 4,200

UNIT-IV Cost A/C CBCS- (MBA-II Sem.) By Prof. Yogesh Dhoke Page 2
 Direct exp. outstanding 480 360

Value of plant (31st Dec 2010) 22,000 19,000

The contract price was Rs.5, 00,000 for A, andRs.4, 00,000for B. Cash received from the
contractee 80% of the value of work certified. Prepare contract and contractee A/c which
showing for profit for an individual.

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Problem no.5
M/S Raju and Mohan Ltd. Were engaged in one contract during the year the contract price
was Rs.4, 00,000. The trial balance extracted from the books.

Particular Amount Amount

Share capital 80,000

Sundry creditors 8,000

Land & Building 34,000

Bank 9,000

Material 75,000

Plant 20,000

Wages 1, 05,000

Expenses 5,000

Cash received (80% of work certified) 1, 60,000

2, 48,000 2, 48,000

Of the plant and material charge to the contract, plant cost Rs.3, 000, material costing
Rs.8, 400 was destroyed by an accident.

On 31st December, plant which cost Rs.4000 was return to store, the value of material
on site was Rs.3000, cost of work done but not yet certified was Rs.2000.

Charge 10% depreciation on plant. Prepare contract account and balance sheet as on
st
31 December.

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UNIT-IV Cost A/C CBCS- (MBA-II Sem.) By Prof. Yogesh Dhoke Page 3
Problem no. 6
A firm of building contractor begins to trade on 1st April 2009. The following was
expenditure on the contract for Rs.3,00,000 .

Particulars Amount

Material issued to contract 51,000

Plant issued to contract 15,000

Wages incurred 81,000

Other expenses incurred 5,000

Cash received on account to 31st March 2008, Rs. 1,28,000 been 80% of work certified, plant
and material chare to the contract plant which cost Rs. 3000, material cost Rs. 2,500 . On 31st
March 2010, plant was cost Rs. 2000 return to store. The cost of work done but uncertified
was Rs. 1000 and material costing Rs. 2,300 was in hand on site. Charge 15% depreciation on
plant at to the profit and loss account 2/3rd of profit received.

Prepare contract account and balance sheet.

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Problem no. 7
A company undertook a contract for construction of large building, the construction work
commenced on 1st April. The following data is available for year ending 31st March.

Particulars Amount

Contract price 35,000

Work certified 20,000

Cash Received 15,000

Material issued to site 7,500

Planning estimating cost 1000

Direct wages 4000

Material returns to store 250

Plant hired charges 1,750

Wages related cost 500

UNIT-IV Cost A/C CBCS- (MBA-II Sem.) By Prof. Yogesh Dhoke Page 4
Site office cost 678

Head office exp 375

Direct exp 902

Work not certified 149

The contractor owned a plant which originally cost Rs.2000 has been continuously used in
this contract throughout the year. The residual value of the plant after 5 year of life is
expected to be Rs. 500 by straight line method of depreciation is used. As on 31st March
2010, direct wages due and payable amount Rs. 270 and material at site were Rs200.

You are required to prepare a contract account for 31st March, show the relevant balance
increase in balance sheet.

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Problem no. 8

Contracts
A B C
Rs. Rs. Rs.
Commencement of work
1.1.2010 1.7.2010 1.10.2010
Contract price 80,000 54,000 60,000
Raw materials 14,400 11,600 4,000
Wages 22,000 22,400 2,800
General charges 800 560 200
Plant installed 4,000 3,200 2,400
Material on hand (closing) 800 800 400
Wages accrued 800 800 360
Work certified 40,000 32,000 7,200
Work uncertified 1,200 1,600 420
Cash received against work certified 30,000 24,000 5,400

Depreciate plant @ 10% p.a. which was installed on the opening date of contract in each
case.

*****

UNIT-IV Cost A/C CBCS- (MBA-II Sem.) By Prof. Yogesh Dhoke Page 5
Problem no. 9
From the following particulars relating to a contract , Prepare (a) The Contract Account ,
(b) Contractees account and show the relevant entries in the balance sheet :

Particulars Rs.

Material sent to site 85,349

Labor engaged on site 74,375

Plant installed at cost 15,000

Direct exp 4,126

Establishment charges 3,167

Material return to store 549

Work certified 1, 95,000

Cost of work not certified 4,500

Material on hand, 31st Dec 1,883

Wages accrued due on 31st Dec 2,400

Direct exp accrued due on 31st Dec 240

Value of plant on 31st Dec 11,000

The contract price has been agreed at Rs. 2, 50,000. Cash has been received from the
contractee amounting to Rs. 1, 80,000.

*****
Problem no. 10
A contractor undertook a contract for Rs. 75,00,000 on an arrangement that 80% of work
done are certified by the Architect of the contract should be paid individually find the
remaining 20% should be returned until the contract was completed

Particulars Rs

Material 9, 60, 000

Wages 8, 50, 000

Carriage 50,000

Cartage 5,000

UNIT-IV Cost A/C CBCS- (MBA-II Sem.) By Prof. Yogesh Dhoke Page 6
 Sundry exp 35,000

The work was certified for Rs 18,75,000 and 80% of this was paid as agreed.

In 2009, the amount expanded were :

Particulars Rs.

Material 11, 00,000

Wages 11, 50,000

Carriage 1, 15,000

Cartage 10,000

Sundry exp 20,000

3/4th of the contract was certified as done by 31st Dec and 80% of this was received
accordingly. The value of unused stock in progress uncertified was a certain @ Rs. 1, 00,000.

In 2010 account were mentioned below:

Particulars Rs

Materials 6, 30,000

Wages 8, 50,000

Cartage 30,000

Sundry expenses 15,000

The whole account was completed on 30th June. Show the contract account, contractee
account and relevant items in the balance sheet for all 3 years.

*****

UNIT-IV Cost A/C CBCS- (MBA-II Sem.) By Prof. Yogesh Dhoke Page 7
 Operating or Service Costing
Operating costing method is one designed to ascertain and control the costs of the
undertakings which do not produce products but which render services. Operating costing is
also known as service costing. It is that form of operation costing which applies where
standardized services are provided either by an undertaking or by a service cost centre within
an undertaking.

Operation costing is the cost of rendering services. It is the cost of producing and maintaining
a service. Industries using operating costing do not produce tangible products; but useful
service is rendered; for example, transport services, utility services like hospitals, canteens
etc., distribution services like supply of electricity, gas etc. There is internal as well as
external service. Service rendered in the same organization is known as internal service, for
example, repairs and maintenance department or canteen in a factory. Services rendered to
consumers are known as external service; for example, hospitals, transport companies,
electricity etc. The operating cost per unit is calculated by dividing the total cost by the
number of service units produced or rendered.

Characteristics:
Operating costing has special application to undertakings which provides services to the
community as a whole rather than manufacture of products. Such undertakings where
operating is applied, generally possess the following characteristics:

1. These undertakings render unique services to their customers.

2. They invest large proportion of their capital in fixed assets.
3. The requirement of working capital is comparatively less.
4. The operating cost is divided into fixed and variable and they are of utmost
importance.

Transport Costing :
It is very essential to differentiate the costs of different expense heads. In a broad way there
are two types fixed (standing) costs and operating and running charges. Fixed costs are those
which are incurred irrespective of mileage run. These are the expenses for the vehicles. At the
same time, maintenance repairs, petrol oil etc. Which are directly proportional or related to
the mileage run are known as maintenance charges. For the sake of convenience, the costs
are classified into the following categories.

1. Fixed or Standing Costs :- These include salary of operating manager, supervisor

etc; e.g., insurance, motor vehicle tax, garage rent, establishment expenses of
workshop and head office, general supervision, interest on capital etc.
2. Maintenance Charges:- These are semi-variable expenses which include the cost of
tyres and tubes, repairs and paints, spares and accessories, overheads etc.
3. Operating and Running Charges:- These vary in direct proportion to kilometers and
include:
UNIT-IV Cost A/C CBCS- (MBA-II Sem.) By Prof. Yogesh Dhoke Page 8
 (a) Petrol, oil, grease etc. (b) wages of driver, conductor, attendant, etc., if payment is
related to time or distance of trips,(c) commission of undertaking, if any,(d)
depreciation, if it is allocated on the basis of mileage run; and as such it is treated
as variable expenses.
If the payment is made to drivers and conductors as fixed sum without taking
into account the distance covered or the number of trips made, then it is a fixed
charge.

Problem no.1
The Road Transport Co. which keeps a fleet of lorries, gives the following information:

Kilometers run for April 30,000

Wages for April Rs. 2,000
Petrol, Oil etc., for April Rs. 4,000
Original cost of vehicles Rs. 1, 00,000
Depreciation to be allowed @ 25% per annum on original cost.
Repairs for the month of April Rs. 6,000
Garage rent etc., for April Rs. 1,000
License, Insurance etc., for the year Rs. 6,000
Prepare a statement for April, showing the fixed and variable cost per running km.

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Problem no.2

A transport company is running two buses between two places 100 kms. apart. The seating
capacity of each bus is 50 passengers. The following particulars are taken from their books
for a month:
Rs.
Wages of drivers, conductors and cleaners 3,000
Salary of supervisory and office staff 1,500
Diesel oil etc. 6,000
Repairs and maintence 1,500
Taxation and insurance 2,000
Depreciation 3,000
Interest and other charges 2,500
The actual passengers carried were 80% of the capacity. The buses ran on all the days. Each
bus made a to and fro tip. Find out cost per passenger-km.

UNIT-IV Cost A/C CBCS- (MBA-II Sem.) By Prof. Yogesh Dhoke Page 9
Problem no.3

A Transport service company is running 4 buses between two towns 50 miles apart.
Seating capacity of each bus is 40 passengers. The following particulars were obtained
from their books:

Rs.
Wages of drivers, conductors and cleaners 2,400
Salaries of office and supervisory staff 1,000
Diesel oil and other oils 4,000
Repairs and maintenance 800
Taxation, insurance etc. 1,600
Depreciation 2,600
Interest and other charges 2,000
14,400
Actual passengers carried were 75% of the seating capacity. All the four buses ran on
all the days of the month. Find out the cost per passenger mile.

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Problem no.4
From the following data calculate the cost per mile of a vehicle.
Rs.
Value of vehicle 15,000
Road licence for the year 500
Insurance charges per year 100
Garage rent per year 600
Drivers wages per month 200
Cost of petrol per litre 8
Miles per litre 8
Proportional charge for tyre and maintenance per mile 20
Estimated life 1, 50,000 miles
Estimated annual mileage 6,000

*****

UNIT-IV Cost A/C CBCS- (MBA-II Sem.) By Prof. Yogesh Dhoke Page 10
 Problem no.5
Mr. Ahuja runs a tempo service in the town and has two vehicles. He furnishes you
the following data and wants you to compute the cost per running mile.

Vehicle A Vehicle B
Rs. Rs.
Cost of vehicle 25,000 15,000
Road license per year 750 750
Supervision and salary (yearly) 1,800 1,200
Drivers wages per hour 4 4
Cost of fuel per liter 1.50 1.50
Repairs and maintenance per mile 1.50 2.00
Tyre cost per mile 1.00 0.80
Garage rent per year 1,600 550
Insurance premium yearly 850 500
Miles run per liter 6 5
Mileage run during the year 15,000 6,000
Estimated life of vehicle 1, 00,000 miles 75,000 miles
Charge interest at 10% p.a. on the cost of vehicles. The vehicles run 20 miles per hour on
an average.

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Problem no.6
Union Transport Company supplied the following details in respect of a truck of 5 tonnes
capacity:
Cost of truck Rs.90, 000
Estimated life 10 years
Repairs & Maintenance Rs.500 p.m.
Drivers wages Rs.500 p.m.
Insurance Rs.4,800 p.a
General supervision charges Rs.4,800 p.a
Scrap value Rs.4,500
Diesel,oil,grease Rs.15 per trip, each way
Cleaners wages Rs.250 p.m.
Tax Rs.2,400 p.a
The truck carries goods to and from the city covering a distance of 50 miles each way.
On outward trip freight is available to the extent of full capacity and on return 20% of
capacity.
Assuming that the truck runs on average 25 days a month, work out:
(a) Operating cost per tone mile.
(b) Rate per tone per trip that the company should charge if a profit of 50% on freightage is
to be earned.

UNIT-IV Cost A/C CBCS- (MBA-II Sem.) By Prof. Yogesh Dhoke Page 11
Problem no. 7
From the following data pertaining to the year 2010 prepare an operating cost sheet
showing the cost of electricity generated per Kwh.by thermal Power Statiion:

Total units generated 10, 00,000 Kwh.

Operating labour Rs. 65,000

Repairs and maintenance Rs. 55,000

Lubricants, spares and stores Rs. 50,000

Plant supervision Rs. 40,000

Administration overheads Rs. 25,000

Coal consumed per Kwh.for the year is 2.5 Kg.@ of Rs. 0.05 per Kg.

Charge depreciation @ 10% on capital cost of Rs.2,00,000

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Hospital Costing:
The main purpose of hospital costing is to ascertain the cost of providing medical services.

A hospital is usually divided into a number of departments on the basis of functions

performed. However, the main function of hospitals is to render medical services. Each
department has a separate cost unit. The miscellaneous service departments such as ,
transport, dispensary ,cleaning , administration ,etc. are to be apportioned to the other
departments on equitable basis.

Canteen Costing:
There are many undertakings which provide facilities of cheap canteen to their workers. The
expenditures incurred for serving meals or dishes of different varieties may be grouped under
various heads like provisions, information ,labour, services, consumable stores and
miscellaneous items. A cost statement may also provide information about the subsidy
received, if any, from any agency and the revenue from sales etc. so as to show the net
operating profit or loss.

UNIT-IV Cost A/C CBCS- (MBA-II Sem.) By Prof. Yogesh Dhoke Page 12
 Problem no.8

Following are the information given by an owner of hotel. You are required to advise him
what rent should be charges from the customers per day so that he is able to earn 25% on
cost other than interest.
1. Staff salaries : Rs.80,000 p.a
2. Room attendants salary Rs.2 per day. The salary is paid on daily basis and services
of room attendant are needed only when the room is occupied. There is one room
attendant for one room.
3. Lighting, heating and power : The normal lighting expenses for a room if it is
occupied for the whole month is Rs.50 per room. Power is used only in winter and
normal charges per month if occupied for a room is Rs.20.
4. Repairs to building Rs.10, 000 p.a.
5. License etc.Rs.4, 800 p.a.
6. Sundry Expenses Rs.6,600 p.a.
7. Interior decoration and furnishing Rs.10, 000 p.a.
8. Cost of building Rs.4,00,000: Rate of depreciation 5%
9. Other equipments Rs.1,00,000 rate of depreciation 10%
10. Interest @ 5% may be charged on its investments of Rs.5, 00,000 in building and
equipments.
11. There are 100 rooms in the hotel and 80% of the rooms are normally occupied in
summer and 30% of the rooms are busy in winter.

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Problem no.9
Work out in the appropriate cost sheet form, the unit cost passenger kilometer for the year of
the passenger buses run by Gupta Transport Services Corporation, from the following records
of the company.

1. Three passenger deluxe buses of Rs.2,00,000; 3,50,000 and Rs.4,00,000

2. Yearly depreciation of the vehicles @ 20% of the cost.
3. Annual repairs, maintenance and spare parts :80%of depreciation
4. Wages of six drivers at Rs.3, 000 each per month.
5. Yearly rate of interest on capital at 5%.
6. Rent of 3 garages @ Rs.200 each per month.
7. Wages of 10 cleaners @ Rs. 1,000 per month.
8. Directors fees @ Rs.1,000 per month.
9. Office establishment @ Rs.3,000 per month.
10. License and taxes @ Rs.1,500 every month.
11. Realisation of sale proceeds of old tyres and tubes Rs.2,000 every six month.
12. 1,000 passengers were carried over 1,500 Kms. during the year.

UNIT-IV Cost A/C CBCS- (MBA-II Sem.) By Prof. Yogesh Dhoke Page 13
 Problem no.10
From the following data, calculate cost per meal for canteen run by joint councils of
employees and management of Ram Ltd.

1. Purchase for the month of January :

Meat 100 Kgs @ Rs. 60 per Kg.

Eggs 40 dozens @ Rs. 12 per doz.

Vegetables Rs.550

Bread items Rs. 1,000

Rice etc. Rs. 1,600

2. Wages and Salaries:

Two cooks @ Rs. 2,000 p.m. each

One counter clerk @ Rs.950 p.m.

4 helpers @ Rs. 500 p.m each

One manager who is paid Rs. 1,200 p.m.

3. Consumable stores Rs. 7,200 p.a.

4. Gas and electricity Rs. 700 for two months
5. Overheads allocated to the canteen Rs. 3,000 p.a
6. Company subsidy Rs. 1,800 for half year.
7. Number of meals served in January 1,500.

Ref.: Cost Accounting By R.S.N.Pillai & V.Bhagavathi- S.Chand Publication

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