Questions on Contract Costing


Mkulima Engineering Ltd. undertakes repair and reconditioning work on agricultural machinery. It is the company practice to charge out each job at a profit of 15% of the invoice value.

Cost card relating to completed jobs for the year ended 31 may 1996 have been summarized as follows:

  Sh. Sh.
Materials issued   232,000
Direct labour   170,000
20% on material 46,400  
100% on direct labour 170,000 216,400
Carriage   6,350
Profit   110,250
Sales   735,000

 The firm’s accountants have summarized the financial accounts for the year as follows:

Sales   735,000
Stocks and work-in-progress Sh.  
1 June 1995 90,000  
Purchases of materials 256,500  
Stocks and work-in-progress 31 May 1996 100,500  
Factory wages 255,000  
Factory expenses 100,000 601,000
Gross profit   134,000
General Office expenses 42,000  
Selling expenses 18,000  
Carriage on completed jobs 6,000 66,000
Net Profit   68,000

Additional Information

1. The composition of the stocks and work-in-progress figures is as follows:

  1 June 1995 31 May 1996
  Sh. Sh.
Stocks of materials 30,000 31,000
Materials 45,000 45,500
Labour 15,000 24,000

2. Factory wages consist of Sh.194,000 for direct labour and Sh.61,000 for indirect labour.

3. Included in the purchases of materials figure is Sh.10,500 in respect of consumable stores all of which were used during the year.


a) A statement reconciling the two profit figures for the completed jobs summary and the annual accounts (14 marks)

b) Outline the possible reasons for the discrepancies, which your reconciliation reveals.

(6 marks)      (Total: 20 marks)


The following data relates to Optimal Company, a manufacturer of a toothpaste product.

Financial extracts for the month of May 1996

Fixed costs Sh.200,000

Variable cost Sh.12 per unit

Selling price Sh.28 per unit

The current production is at 75% capacity and the number of units produced and sold is 37,500 units.


a) The break even point in units and in shillings (5 marks)

b) The percentage capacity at break even point (3 marks)

c) The profit or loss at current production capacity (4 marks)

d) A new break even point in units assuming that a new machine is bought, in order to increase production. The new machine will increase the fixed costs by Sh.70,000 but the variable costs will reduce to Sh.7 per unit. (4 marks)

e) State four assumptions that you have taken into account in answering the sub-questions a, b, c and d above. (4marks)

(Total: 20 marks)


L M N Ltd is a small company that makes a single standard product. Their planned budget for the quarter ending 31 May 1996 was 5000 units at a selling of Sh.30 per unit.

The actual financial data for the quarter was 4,800 units which were all sold during the quarter. The actual financial data for the quarter are shown below:-

Direct materials 19,800
Direct wages 29,800
Variable overheads 48,500
Fixed overheads 26,000
Profit 24,400
Sales 148,500

The standard direct wage rate is Sh.15 per hour and standard variable overhead rate is Sh.25 per hour. Cost variances during the period are as follows:

  Gains Losses
  Sh. Sh.
Material price - 200
Material usage - 400
Wages rate 500 -
Labour efficiency - 1,500
Variable overhead price 2,000 -
Variable overhead efficiency - 2,500
Fixed overhead cost - 1,000
Sales price 4,500 -


From the information provided, prepare for the period the original budget and budgeted cost of actual sales, and prepare a statement showing all standards (variances) in respect of the product. (Total: 20 marks)


a) Distinguish between job and contract costing. (5 marks)

b) Jengo construction company was awarded a small contract on 1 July 1995 at an agreed price of Sh.4,000,000. The contract was expected to be completed by 31 March 1996.

The following expenditure was incurred during the year ended 31 December 1995.

Materials delivered to site 1,200,000
Materials sold (Cost Sh.21,000) 13,000
Variable overheads 48,500
Plant delivered to site 400,000
Payment to Sub-contractors 100,000
Wages paid 506,000
Proportion of Head Office costs 60,000

On 31 December 1995 the value of plant was 265,000 and materials remaining at the site was Sh.20,000. The cash received form the client was Sh.2,100,000.

In order to complete the contract on time the following estimates of expenditure were budgeted by the contractor:

Additional materials 600,000
Additional wages 380,000
Additional plant 120,000
Head office expenses 15,000

The value of the plant at the end of the contract will be Sh.195,000. a contingency of Sh.55,000 was provided for.


A contract account for the year ended 31 December 1995 showing the amount to be transferred to the profit and loss account (15 marks)

(Total: 20 marks)


The information given below is in respect of the proposed budget for K.K. Ltd for the six months ending 31 December 1996.

Month SalesSh ‘000’ Material Purchases WagesSh. ‘000’ Production OverheadsSh. ‘000’ Administrative OverheadsSh. ‘000
July 72,000 25,000 10,000 6,000 5,500
August 97,000 31,000 12,100 6,300 6,700
September 86,000 25,500 10,600 6,000 7,500
October 88,600 30,600 25,000 6,500 8,900
November 102,500 37,000 22,000 8,000 11,000
December 108,700 38,800 23,000 8,200 11,500

Additional information

  1. A depreciation expense is expected to be 0.5% of sales.
  2. Expected cash balance in hand on 1 July 1996 is Sh. 72,500,000.
  3. 50% of total sales are cash sales/
  4. Assets are to be acquired in the months of August and October at Sh.8,000,000 and Sh.25,000,000 respectively.
  5. An application has been made to the bank for the grant of a loan of Sh.30,000,000 and it is hoped that it will be received in the month of November
  6. It is anticipated that a dividend of Sh.35,000,000 will be paid in December
  7. Debtors are allowed one month’s credit
  8. Creditors for materials purchases and overheads grant one months credit
  9. Sales commission at 3% on sales is paid to the salesmen each month.


A cash budget for the six months ending 31 December 1996. (Total 20 marks)


State and explain the factors you will take into account when preparing:

a) A sales budget. (10 marks)

b) A purchases budget (10 marks)       (Total: 20 marks)


Discuss the main purposes of advertising by a company with reference to:

a) An existing product (10 marks)

b) A new product (10 marks)              (Total: 20 marks)