Contract costing (a) PZ ple undertakes work to repair, maintain and construct roads. When a_ customer requests
Question:
Contract costing
(a) PZ ple undertakes work to repair, maintain and construct roads. When a_ customer requests the company to do work PZ ple supplies a fixed price to the customer and _allocates a works order number to the customer’s request. This works order number is used as a reference number on material requisitions and timesheets to enable the costs of doing the work to be collected.
PZ plc’s financial year ends on 30 April. At the end of April 2000 the data shown against four of PZ ple’s works orders were:
Overhead costs are allocated to works orders at the rate of 40% of direct labour costs.
It is company policy not to recognize profit on long-term contracts until they are at least 50% complete.
Required:
(i) State, with reasons, whether the above works orders should be accounted for using contract costing or job costing.
(4 marks)
(ii) Based on your classification at (i) above, _ prepare a statement showing clearly the profit to be recognized and balance sheet work in progress valuation of each of the above works orders in respect of the financial year ended 30 April 2000.
(10 marks)
(iii) Comment critically on the policy of attributing overhead costs to works orders on the basis of direct labour cost.
(6 marks)
(b) Explain the main features of process costing.
Describe what determines the choice between using process costing or specific order costing in a manufacturing organization.
B_ the cost of raw materials.
C their scrap value.
D_ the cost of good production less scrap value.
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