CA Intermediate · Cost and Management Accounting · Job Costing
Which of the following best describes a 'cost-plus' job contract as used in job costing?
A cost-plus job contract fixes the price as the actual cost of the job plus an agreed profit, expressed as a percentage or a fixed fee. The customer bears the cost variation, unlike a fixed-price contract where the contractor bears any overrun.
- AThe selling price is fixed in advance and the contractor bears any cost overrun
- BThe contract price is the actual cost of the job plus an agreed percentage or fixed fee as profitCorrect
- CThe price is determined by the market rate for similar jobs irrespective of cost
- DThe job is costed only on direct material, with overheads ignored
Explanation
In a cost-plus contract the customer pays the actual cost incurred on the job plus an agreed margin, either as a percentage or a fixed fee. Option A describes a fixed-price contract, where the contractor carries the cost overrun risk.
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