Contrast Costing

Posted in Finance, Accounting and Economics Terms, Total Reads: 1925

Definition: Contrast Costing

Contract costing is a method of cost accounting to account and identify all the expenses related to fulfillment of a contract. It is also called as terminal costing. A contract ledger is kept for this purpose which has different accounts showing the expenses a company is incurring. Basic account headings are:

  • Material Cost
  • Labor Cost
  • Direct Expenses
  • Overheads
  • Sub- Contract Cost
  • Cost of Extra Work

These various accounts are part of contract account which shows all the expenses on debit side and the earnings through contract fulfillment on the credit side. The difference between the two shows the earnings of the company through this particular contract.

While analyzing and accounting profits from contract fulfillment, contract costing is a much better method than job costing because of availability of contract specific accounts. Also doing analysis through contract accounting gives the company the idea how much cost is it going to incur and thus demand reimbursement accordingly. The various types of reimbursement are fixed fees (contract costing is used to determine how much profit is earned), cost plus (expenses + fixed or percentage profit) and time and material (billings done as per material and time involved and also has profit component).

Hence, this concludes the definition of Contrast Costing along with its overview.

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