Batch Costing and Contract Costing

This is a type of job costing that is used when production consists of limited repetitive work and definite number of item manufactured in one batch. A batch is defined as a cost unit consisting of a group of identical item in particular sizes and colors of shoes, toys, spare parts etc. The total cost incurred in production is spread on the number of units made when the batch is completed.

  1. Procedures:
    • Allocation of batch number
    • Production order is made
    • Creation of batch costs account
    • Completion of the work and closure of the batch cost account
    • Allocation of costs to individual units in the batch
    • Determination of selling price/batch and unit.


This is a form of specific order costing that is applied to relatively large cost units, which normally take a considerable length of time to complete e.g. building or construction works. Contract jobs are undertaken in accordance with specific requirements of contractee/Customer. Contracts may be distinguished from job orders by the following features:

The money value of a contract is much larger than that of a job order.

  • A contract consumes significantly larger amounts of resources than a job order.
  • For a contract, special progress reports are usually made while in job costing, reports are made after the completion of the job.
  • For a contract, indirect costs are relatively smaller in relation to direct costs but the vice versa is time for job order.

To second the progress of contract works, a special account known as a contract account is maintained.


This is a separate account that is opened and maintained for each contract undertaken for the purpose of accumulating cots. Each contract is given a number and all costs relating to that particular contract are recorded in this account. A typical contract account is as shown below:

Contract No. XYZ Account
Materials b/f x Materials returned to store x
Materials purchased x Materials c/d x
Direct wages x Machinery c/d x
Indirect wages x Balance c/d: Cost of work done x
Subcontractors fees x    
Cost of special plant x    
Machinery/Plant b/f x    
Cost of work done b/d x Value of work certified x
Notional Profit x Cost of work done but not certified x
  xx   xx
  • Contract Costing Terminology
  • Principles of profit income recognition in contracts

The Notional Profit

It is a component of 2 items:

  1. Profit taken = Notional profit x 2/3 x cash received/work certified

This formula of calculating the part of national profit taken in the year is used when substantial costs have been incurred on the contract but the contract is not near completion. But when the contract is near completion the profit taken is calculated as:

Profit taken = Estimated profit x cash received/contract price.

Where Estimated profit = Contract price – Estimated total cost and

Estimated total cost = Costs incurred to date and estimated future costs.

  1. Profit not taken = refers to the part of the national profit that is not recognized in the current period. It is profit carried forward to be recognized in the years that follow.
  1. Retention Money

This is a portion of the value of work certified that is retained by the contractor to protect himself from faulty work that might be evident at the time of progress payments or at the completion of the contract. This amount is released after satisfactory performance under the contract.

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