Cost accounting 2010 (Solved)

Cost plus contract: Under cost plus contract, the contract price is ascertained by adding a percentage of profit to the total cost of the work.  Such types of contracts are entered into when it is not possible to estimate the contract cost with reasonable accuracy due to unstable condition of material, labour services etc.

Main features of cost-plus-contracts:
a)      This method is adopted in the case of those contracts where the probable cost of contract cannot be ascertained in advance with a reasonable accuracy.
b)      These contracts are preferred when the cost of material and labour is not steady and contract completion may take number of years.
c)       The different costs to be included in the execution of the contract are mutually agreed so that no dispute may arise in future in this respect. Under such type of contract contractee is allowed to check or scrutinize the concerned books, documents accounts.
d)      Such a contract offers a fair price to the contractee and also a reasonable profit to contractor.
e)      The contract price here is ascertained by adding a fixed and mutually pre-decided component of profit to the total cost of the work.

Costs plus contracts have the following advantages:
a)      The contractor is assured of a fixed percentage of profit. There is no risk of incurring any loss on the contract.
b)      It is useful especially when the work to be done is not definitely fixed at the time of making the estimate.
c)       Contractee can ensure himself about “the cost of the contract”, as he is empowered to examine the books and document of the contractor to ascertain the veracity of the cost of the contract.