Chapter summary on costing systems

Cost/Management Accounting notes

In job costing, overheads are charged on the basis of a predetermined overhead absorption rate.
Procedure in job costing are as follows

 Allocation of batch number

 Production order is made

 Creation of batch costs account

 Completion of the work and closure of the batch cost account

 Allocation of costs to individual units in the batch

 Determination of selling price/batch and unit.

Contracts may be distinguished from job orders by the following features:

 The money value of a contract is much larger than that of a job order.

 A contract consumes significantly larger amounts of resources than a job order.

 For a contract, special progress reports are usually made while in job costing, reports are made after the completion of the job.

 For a contract, indirect costs are relatively smaller in relation to direct costs but the vice versa is time for job order.

Progress payments: these are interim payments made by the client to the contractor throughout the course of the work.

Architects certificate: this is a certificate that provides confirmation that work done up to a certain value has been completed

Retention money: this is a proportion of value of work certified withheld by the customer for a specified period during which the customer must make good all contractual defects.

Cost of Work certified: this includes the portion of all total costs that relate to the work

The Notional Profit: this is the difference between the value of work certified to date and cost of work certified to date less a provision for any anticipated unforeseen eventualities.

Profit not taken: refers to the part of the notional profit that is not recognized in the current period. It is profit carried forward to be recognized in the years that follow.

Principles of profit recognition under contracts
The concept of prudence should be applied when determining the profits or losses to be taken up on accounts.

(i) If the contract is in its early stages, no profits should be taken until when the outcome
can be measured with reasonable certainty

(ii) Where a loss has occurred, it must be recognized in the period it has occurred regardless
of the stage of maturity of the project or the timing.

(iii) When substantial costs have been incurred on the contract but the contract is not near completion, the notional profit is apportioned using the formula in order to determine the notional profit taken.

Equivalent units :This is a notional quantity of completed goods in the production process

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