CMA Intermediate · Cost Accounting · Direct Expenses
Gupta Constructions paid Rs 50,000 to an outside specialist for a structural drawing needed only for Contract C-5. At the year end the contract was 40% complete. Which statement about treating this cost is correct?
The Rs 50,000 is a direct expense charged in full to Contract C-5 when incurred. The drawing is traceable to that single contract, so it is not an overhead, and the 40% stage of completion does not reduce the cost recorded.
- AIt is a direct expense charged to Contract C-5 in full when incurredCorrect
- BIt is an administrative overhead apportioned across all contracts
- CIt is excluded from cost and charged to the profit and loss account
- DIt is charged to the contract only to the extent of 40%
Explanation
The drawing is specific to Contract C-5, so it is a direct expense of that contract and is debited to it in full when incurred. The 40% completion only affects profit recognition, not the amount of cost incurred. Treating it as general overhead ignores its traceability.
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