Contract Costing PCC - Query - Students

Question:

MNP Construction Ltd commenced a contract on April 1, 2004. The total contract was for Rs.17,50,000/-. It was decided to estimate the total profit and to take to the credit of P&L a/c the proportion of estimated profit on cash basis which work completed bore to the total contract. Actual expenditure in 2004-05 and estimated expenditure in 2005-06 are given below:

	2004-05 (Actual)	2005-06 (Estimated)
Materials Issued	3,00,000	5,50,000
Labour: Paid	2,00,000	2,50,000
Outstanding Labour	20,000	30,000
Plant Purchased	1,50,000	-
Expenses: Paid	75,000	1,50,000
: Prepaid at end	15,000	-
Plant returns to store (historical Cost)	50,000	1,00,000
	(On Dec 31, 2005)
Material at site	20,000	50,000
Work Certified	8,00,000	Full
Work Uncertified	25,000	NIL
Cash Received	6,00,000	Full

The Plant is subject to annual depreciation @ 25% of WDV Cost. The contract is likely to be completed on Dec 31, 2005. Prepare the contract a/c. Determine the profit on the contract for the year 2004-05 on prudent basis, which has to be credited to P&L a/c.

Solution (As per ICAI Study Material):

Contract a/c (1^st Apr, 2004 to 31^st March, 2005)


Materials	3,00,000	By plant returned	37,500
Labour: paid	2,00,000	By materials at site	20,000
:Outstanding	20,000	By work certified	8,00,000
To plant purchased	1,50,000	By work uncertified	25,000
To expenses	60,000	By plant at site	75,000
To notional profit c/d	2,27,500
	9,57,500		9,57,500
To P&L a/c	66,321.43	By notional profit	2,27,500
To Work in progress a/c	1,61,178.57
	2,27,500		2,27,500

Contract a/c for computing estimated profit (1^st Apr, 2004 to 31^st Dec, 2005)


Materials (3,00,000+5,50,000)	8,50,000	By plant returned on 31^st mar, 05	37,500
Labour: paid(2,00,000+2,30,000+ 30,000)	4,80,000	By materials at site	50,000
		By plant returned on 31^st dec, 05	60,937.50
To plant purchased	1,50,000	By contractee a/c	17,50,000
To expenses(60,000+165,000)	2,25,000
To estimated profit	1,93,437.5
	18,98437.50		18,98437.50

Estimated profit * Cash received / Contract price

= 1,93,437.5*6,00,000/17,50,000

= 66,321.43

Solution as per my classroom :

Calculation of estimated profit as per my classroom notes:

Estimated profit = contract price – Total cost

Total Cost:

Cost incurred to date = 8,25,000 – 2,27,500 = 5,97,500

Estimated Cost to complete contract:

Material = 5,50,000-50,000 = 5,00,000

Labour = 2,50,000-20,000+ 30,000 = 2,60,000

Expenses paid = 1,50,000 – 15,000 = 1,65,000

Depreciation on plant: 75,000*25%*9/12 = 14,063

15,36,563

Estimated profit = 17,50,000-15,36,563 = 2,13,437

Which procedure is correct to approach estimated profit ? Is it ICAI Study material or my classroom notes ? and which answer is correct from the above ?