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      Question

      During the execution of a construction contract, the

      following events occurred: ·        Materials worth ₹5 lakh were damaged due to heavy rainfall and became unusable. ·        After the heavy rainfall, the client requested to construct an extra parking shed which was not part of the original contract. The contractor raised a claim of ₹25 lakh for this additional work. How should these items be treated in contract costing?
      A ₹5 lakh charged to Costing P&L Account; ₹25 lakh treated as contingent income Correct Answer Incorrect Answer
      B ₹5 lakh treated as abnormal loss; ₹25 lakh added to general overheads Correct Answer Incorrect Answer
      C ₹5 lakh included in contract cost; ₹25 lakh treated as variation work credited to contract Correct Answer Incorrect Answer
      D ₹5 lakh excluded from contract cost; ₹25 lakh treated as capital receipt Correct Answer Incorrect Answer
      E ₹5 lakh treated as indirect expense; ₹25 lakh ignored until cash is received Correct Answer Incorrect Answer

      Solution

      The material loss of Rs.5 lakh is considered a normal loss due to unavoidable occurrence of rainfall at the site. Normal loss is part of the contract cost and therefore will be charged to contract cost. Note - If the loss was abnormal (fire/theft), then it would have been charged to Costing P&L The Rs.25 lakh of additional shed is extra work at the request of the client. As it was not a part of the original contract, it represents extra or variation work. The amount claimed by the contractor will be credited to contract account.

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