CONTRACT COSTING

A contract usually takes several years to get itself completed. If the
profit on such contracts is recorded only after their completion, then wide fluctuations may
be noted in the profit figures of contractors from year to year. To avoid these fluctuations
in the reported profits and to reflect the revenue in the accounting period during which the
activity is undertaken, the profit in respect of each contract in progress is transferred to
the profit and loss account of the year by calculating the notional profit. The portion of
notional profit to be transferred to the profit and loss account depends on the stage of
completion of a contract. To determine such a profit figure the knowledge of various
concepts as discussed below is essential in contract costing.