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CMA Intermediate · Cost Accounting · Contract Costing

While executing a contract, the contractee orders additional work outside the original scope. The usual accounting treatment in contract costing is to:

Extra work ordered by the contractee is normally added to the original contract price, and its costs are debited to the same contract account, so profit is measured on the revised contract value. It is treated separately only when it is a distinct contract, not merely by default.

  1. AIgnore the extra work until the whole contract is complete
  2. BTreat the extra work as a separate contract in all cases, never combining it
  3. CAdd the agreed extra work price to the contract price and its cost to the contract account, if it is not a distinct contractCorrect
  4. DCharge the cost of extra work to the Costing Profit and Loss Account immediately

Explanation

Extra work ordered by the contractee is added to the contract value and its cost is debited to the same contract account, unless it is treated as a separate contract. Charging it directly to the P&L account would omit the matching revenue.

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