What Is Contract Costing?

Contract cost refers to the related costs incurred for the construction of a contract. Contract costs include direct costs and indirect costs related to the execution of the contract, which occur from the time the contract is signed to the time it is completed. The "direct costs" mentioned here refer to the various expenses incurred for the completion of the contract, which can be directly included in the contract cost accounting object. "Indirect costs" refers to all expenses incurred for the completion of the contract and which are not directly attributable to the contract costing object and should be allocated to the relevant contract costing object.

Contract cost

Contract cost refers to the related expenses incurred for the construction of a contract. The contract costs include the costs incurred from the signing of the contract to the completion of the contract and related to the execution of the contract.
Calculation of taxes
(One)
Expenses included in contract costs
Direct costs. Because direct costs can distinguish the beneficiaries when incurred, direct costs are directly included in contract costs when incurred.
Extra charges. Although indirect costs also constitute a component of contract costs, indirect costs should generally not be directly attributed to the beneficiary when incurred, but should be apportioned and included in contract costs in a systematic and reasonable manner at the balance sheet date.
In practice, the methods for allocating indirect costs include the labor cost ratio method and the direct cost ratio method.
(1) Labor cost ratio method. The labor cost ratio method is a method of allocating indirect costs based on the labor costs actually incurred in each contract. The calculation formula is as follows: indirect cost allocation rate = all indirect costs actually incurred in the current period ÷ the actual labor costs incurred by each contract in the current period and the indirect costs that should be borne by a contract in the current period = labor costs incurred in the current period of the contract × indirect cost allocation rate
Example: The first project manager department of a construction company concurrently constructs three contract works of A, B, and C. It is known that the labor cost of contract A is 1.4 million yuan, the labor cost of contract B is 1.6 million yuan, and the labor cost of contract C is 2 million yuan. . The first project manager department incurred a total of 500,000 yuan in indirect expenses. Burden Allocation Rate = 50 ÷ (140 + 160 + 200) = 10%
A Contract indirect costs = 140 × 10% = 14 (ten thousand yuan)
B. Indirect costs that should be borne by the contract = 160 × 10% = 16 (ten thousand yuan)
C Contract indirect expenses = 200 × 10% = 20 (ten thousand yuan)
Its account processing is as follows:
Actual indirect costs:
Borrow: Construction-Indirect costs 500 000
Loans: bank deposits, etc. 500 000
On the balance sheet date, the indirect cost allocation is included in the cost of each contract:
Borrow: Engineering Construction-Contract Cost-A Contract 140 000
B contract 160 000
C contract 200,000
Loan: engineering construction-indirect costs 500 000
(2) Direct cost ratio method. The direct cost ratio method is a method of allocating indirect costs based on the actual direct costs incurred by each contract. Calculated as follows:
Indirect cost allocation rate = all indirect costs actually incurred in the current period ÷ the total direct costs incurred by each contract in the current period and the indirect costs that should be borne by a contract in the current period = the direct costs incurred in the current period in the contract × the indirect cost allocation
Borrowing costs related to construction contracts
The construction contractor builds assets for the client, usually the client raises funds and regularly pays the construction progress payment to the construction contractor according to the contract. However, the construction contractor may also borrow money from the bank during the construction of the contract due to fund turnover and other reasons, and incurring borrowing costs. The borrowing costs incurred by the construction contractor during the construction period of the contract shall be included in the contract costs if they meet the capitalization conditions stipulated in the Accounting Standards for Business Enterprises No. 17-Borrowing Costs. The borrowing costs incurred after the completion of the contract shall be included in the current profit and loss and no longer be included in the contract costs.
Sporadic returns
Scattered income related to the contract refers to the non-recurring income obtained during the execution of the contract, but not included in the contract revenue, and should be offset against the contract costs. For example, the proceeds from disposal of residual materials (referred to as scraps of some materials and materials generated during the construction process) after the completion of the contract. Since the value of the received materials has been directly included in the cost of the project when the materials are used for the project, the scraps of the materials have been included in the contract costs. Therefore, the revenue from the disposal of these residual materials should be offset by the contract costs.
Expenses not included in contract costs
The following expenses are period expenses and should be included in the current profit and loss when incurred, and not included in the cost of the construction contract:
The administrative expenses incurred by an enterprise's administrative department for organizing and managing production and operation activities. The "enterprise administrative department" mentioned here includes the head office of a construction and installation company, the headquarters of a ship, an aircraft, a large-scale machinery and equipment manufacturing enterprise.
Selling expenses for shipbuilding and other manufacturing companies.
Borrowing costs incurred by an enterprise to borrow money for construction contracts that do not meet the capitalization conditions specified in the Accounting Standards for Business Enterprises No. 17-Borrowing Costs For example, after the completion of the construction contract, the company's net interest expenses, net exchange losses, financial institution fees, and other financial costs incurred in financing.
Relevant expenses incurred for the conclusion of the contract. Such as the travel expenses and bidding costs incurred by an enterprise to conclude a contract. The related expenses incurred due to the conclusion of the contract are directly included in the current profit and loss when incurred, and are calculated through the "management expenses" account.

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