What is a contract costing?

A contract costing is the allocation of the costs of performing a contract to the individual cost objectives or products that are identified with that contract. Contract costing can be used to establish the selling price of a product or service, as well as to allocate overhead costs to specific contracts.

What is the importance of contract costing?

Contract costing is important because it allows businesses to track and understand the costs associated with each contract. This information can be used to make decisions about whether or not to bid on a contract, as well as to set prices for products and services.

How is contract costing done?

There are several ways to perform contract costing. The most common approach is to use a cost driver, which is a measure of the activity that causes costs to be incurred. For example, the number of labor hours worked might be used as a cost driver to allocate the costs of employee wages to specific contracts. Another approach is to use cost pools, which are groups of costs that are associated with a specific contract. Costs in a cost pool can be allocated to a contract based on the amount of the contract or some other measure of the activity that caused the costs to be incurred.

What are the benefits of contract costing?

Some of the benefits of contract costing include a better understanding of the costs associated with specific contracts, improved decision-making about whether to bid on a contract and more accurate pricing for products and services. Contract costing can also help businesses to identify opportunities for cost reduction and improve their profitability.

Are there any drawbacks to contract to cost?

There are a few drawbacks to contract to cost. First, it can be time-consuming and labor-intensive to establish the cost drivers and allocate costs to specific contracts. Second, the accuracy of the information can be affected by the quality of the data that is used to establish the cost drivers. Finally, contract costing can be complex and difficult to understand, which can make it challenging to use the information for decision-making.

Specific Order Costing McQs Quiz With Answers

Complete this quick set of multiple choice questions (MCQs) to test your knowledge of the specific order costing system. You can use this quiz to help prepare for your exams, interviews, and other assessments.

1. An essential aspect of long-term costing is that:

It has a duration in excess of twelve calendar months
It has a significant effect on the activity of the contractor for the period under review
Its completion requires several stages, each of which must be certified and valued for profit calculation purposes
It has a duration in excess of six calendar months

2. A debit balance on the contractee account should be incorporated in the balance sheet as:

A current liability as contract balances outstanding
An item set-off against contract stock valuation.
Excess payments on account not set off against contract stock value
In debtors as amount recoverable on contract

3. Retention monies are best defined as:

Cash withheld by the contractee to improve the cash flow of the contractor
Payments to contractors to secure their services for a future contract
Cash returned to the contractee if actual profits on a contract are higher than an agreed figure
Cash withheld by the contractee under the terms of the contract when the payment of the value certified is made

4. A zero value of attributable profit should be assumed where:

Any foreseeable loss is estimated for a later stage in the contract
The interim estimated profit is less than 10% of the value certified
The profit outcome of the contract cannot be estimated with reasonable certainty
The contract is less than 60% completed

5. Which of the following is the most appropriate definition of turnover at an intermediate stage in a contract?

The value of work done, which leaves the agreed attributable profit when the cost of work certified is subtracted from it
Cost of work certified to date plus estimated profit to the end of the contract
The value of work certified less any foreseeable losses
Cost of work to date minus the cost of work not certified plus estimated profit to date