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CMA Intermediate · Cost Accounting · Contract Costing

Under a cost-plus contract, the contractee agrees to pay the contractor:

In a cost-plus contract the contractee pays the actual cost of the contract plus an agreed profit, either a percentage of cost or a fixed fee. This suits work whose cost cannot be estimated reliably in advance, and it shifts cost-overrun risk to the contractee.

  1. AA fixed price agreed before work starts, regardless of actual cost
  2. BThe actual cost of the contract plus an agreed percentage or fixed fee as profitCorrect
  3. COnly the material and labour cost, with no profit element
  4. DThe cost of the work certified, less a retention of the agreed percentage

Explanation

A cost-plus contract is priced on actual cost incurred plus an agreed margin (percentage or fixed fee). Option A describes a fixed-price contract. The contractor bears little cost-overrun risk in cost-plus contracts.

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