[klmc]

I’m having a hard time understanding these methods of cost allocation. Can someone clarify with a short example,

thanks in advance.

|FAR| - 72, 83
|AUD| - 73, 76
|REG| - 76
|BEC| - 73, 82

ALL DONE!!

[leglock]

In Percentage of completion you are recognizing revenue based on how much of the job is complete. The driver for determining this is cost. The costs incurred to date as a percentage of total costs dictates how much revenue you recognize.

With installment method, the amount of profit you recognize is based upon gross profit percentage. So if your job has a 25% gross profit percentage, and you just collected 100,000, then you recognize 25,000 of profit.

With cost recovery, you recognize profit only after all your costs have been recovered. So if cost is 50 and sales is 80, and you collect in increments of 20 meaning you make 4 collections of 20, then on collection one and two you recognize no profit because cost is 50 and ytou would only have collected 40 up to that point. On collection three, you would recognize profit of 10 because you now would have recovered all your cost, and on collectoiin four you recognize all 20 as profit.

[leglock]

example of percentage completion is if at project inception you believe costs will be 1 million and the sales price is 2 million, then at the end of year you calculate how much cost you have actually incurred. if you incurred 500k in costs, then 500k / 1 mil is 50%. So the revenue to be recognized is 50% x 2 mil = 1 million in revenue to be recogized in year 1

[Rocky123]

Is that right leglock? Wouldn't your profit only be $1,000,000 total ($2 mil sales price – $1 mil costs)? Based on your example, wouldn't revenue be 50% of 1 mil, $500,000?

The tallest oak in the forest was once just a little nut that held its ground.

AUD-PASS
BEC-PASS
REG-PASS
FAR-PASS

Rocky123, CPA

[leglock]

I should have been more consistent with the terms I was using. In installment and cost recovery example, I was speaking of gross profit and then for percentage of completion i switched over to revenue recognition.

In my percentage of completion example, at the end of year one, Revenue recognized would 50% x 2 mil = 1 mil. Gross profit recognized would be 50% x 1 mil = 500k

[Author]

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