Abnormal costs arise because of any abnormal activity or event not part of routine business operations. In this way the contract bears the charge for the depreciation incurred.
Historical costs are costs incurred in the past. Fixed Costs remain fixed irrespective of changes in the production volume in given period of time.
Classification of costs[ edit ] Classification of cost means, the grouping of costs according to their common characteristics. Another option would be to just charge the depreciation for the period to the contract account debit entry.
This method tended to slightly distort the resulting unit cost, but in mass-production industries that made one product line, and where the fixed costs were relatively low, the distortion was very minor. The usual ways in which plant costs are dealt with are as follows: Semi-variable costs are partly fixed and partly variable.
By Nature or Traceability: We could also include contracts for building ships, and for providing goods and services under a long term contractual agreement. Contract Profit and Loss Account Guidelines on calculating interim profits Various possibilities exist for estimating the profit on incomplete contracts and several options are shown below.
The cost incurred by a company for providing production, administration and selling and distribution capabilities in order to perform various functions.
Completed Contract Formula This formula must be used in the final year when a contract is complete. Thus this is the cost of replacing existing assets at present or at a future date.
This cost is the cost at which existing items of material or fixed assets can be replaced. Indirect costs are allocated or apportioned to cost objects. Direct Costs and Indirect costs. The relevant cost is a cost which is relevant in various decisions of management.
Costs are classified according to their behavior in relation to change in relation to production volume within given period of time. You are recommended to adopt the following guidelines: These costs are normally fixed costs. This department organises the transfer of plant from contract to contract as required and each contract is charged a daily or weekly rental.
Normal costs arise during routine day-to-day business operations. Throughput accounting As business became more complex and began producing a greater variety of products, the use of cost accounting to make decisions to maximize profitability came into question. It also essentially enabled managers to ignore the fixed costs, and look at the results of each period in relation to the "standard cost" for any given product.
When the plant is no longer required and is transferred to another contract or base, the original contract would be credited with the second hand value NBV date of plant transfer. The important ways of classification of costs are: This includes cranes, trucks, excavators, mixers and lorries.
These costs are the costs which are incurred if the operations are shut down and they will disappear if the operations are continued. This allowed the full cost of products that were not sold in the period they were produced to be recorded in inventory using a variety of complex accounting methods, which was consistent with the principles of GAAP Generally Accepted Accounting Principles.
Contract Costing deals with the books of the Contractor only, i. Charge new plant at cost to the contract for which it was purchased.
Management circles became increasingly aware of the Theory of Constraints in the s, and began to understand that "every production process has a limiting factor" somewhere in the chain of production. Contract costing is governed by IAS Advance Cost and Management Accounting Essay Sample Contract costing is a system of job costing that is applied to relatively large cost units, which normally take a considerable length of time to complete.
The beginning of wisdom in using accounting for decision-making is a clear understanding that the relevant costs and revenues are those which as between the alternatives being considered are expected to be different in the future. It has taken accountants a long time to grasp this essential point.
EXECUTIVE PROGRAMME STUDY MATERIAL COMPANY ACCOUNTS, COST AND MANAGEMENT ACCOUNTING MODULE I - PAPER 2. ICSI House, 22, Institutional Area, Lodi Road, New Delhi The Advanced Cost Accounting system provides cost objects for tracking external cost (managerial accounting), and activities and drivers for tracking internal process cost (activity- based costing).
Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future.
 Since managers are making decisions only for their own organization, there is no need for the information to be comparable to similar information from other organizations. Contains leading-edge treatment of innovative management accounting issues used by major companies throughout the world.
Advanced Management Accounting provides a systematic management- oriented approach to advanced management topics. Each chapter is accompanied by cases to illustrate the concepts discussed.Download