Intermediate: Contract costing

(a) PZ pic undertakes work to repair, maintain and construct roads. When a customer requests the company to do work PZ pic supplies a fixed price to the customer and allocates a works order number to the cus¬ tomer’s request. This works order number is used as a reference number on material requi¬ sitions and timesheets to enable the costs of doing the work to be collected. PZ pic’s financial year ends on 30 April. At the end of April 2000 the data shown against four of PZ pic’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 they 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.

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Works order number Date started Estimated completion date 519 488 517 518 1/3/99 1/2/00 14/3/00 18/3/00 31/5/00 30/7/00 31/5/00 15/5/00 (000) (000) (000) 10 (000) Direct labour costs 105 5 Direct material costs 86 7 4 450 135 18 229 Selling price Estimated direct costs to complete orders: Direct labour Direct materials Independent valuation of work done up to 30 April 2000 40 420 60 10 15 350 21 22 2 30 30 15 5