Frequently Asked Questions

What is a contract costing?

A contract costing is the allocation of the costs of performing a contract to the individual cost objectives or products that are identified with that contract. Contract costing can be used to establish the selling price of a product or service, as well as to allocate overhead costs to specific contracts.

What is the importance of contract costing?

Contract costing is important because it allows businesses to track and understand the costs associated with each contract. This information can be used to make decisions about whether or not to bid on a contract, as well as to set prices for products and services.

How is contract costing done?

There are several ways to perform contract costing. The most common approach is to use a cost driver, which is a measure of the activity that causes costs to be incurred. For example, the number of labor hours worked might be used as a cost driver to allocate the costs of employee wages to specific contracts. Another approach is to use cost pools, which are groups of costs that are associated with a specific contract. Costs in a cost pool can be allocated to a contract based on the amount of the contract or some other measure of the activity that caused the costs to be incurred.

What are the benefits of contract costing?

Some of the benefits of contract costing include a better understanding of the costs associated with specific contracts, improved decision-making about whether to bid on a contract and more accurate pricing for products and services. Contract costing can also help businesses to identify opportunities for cost reduction and improve their profitability.

Are there any drawbacks to contract to cost?

There are a few drawbacks to contract to cost. First, it can be time-consuming and labor-intensive to establish the cost drivers and allocate costs to specific contracts. Second, the accuracy of the information can be affected by the quality of the data that is used to establish the cost drivers. Finally, contract costing can be complex and difficult to understand, which can make it challenging to use the information for decision-making.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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