AuthorTopic: percentage of completion method
mogwai
@2014-03-26 14:50:37
Hi all.

Can someone direct me to a place where I can clearly understand how the POC method is used, what steps to follow, in calculating Revenue and Net Income.

I've read the CFA books but they really just gloss over the process you need to follow to end up with what results to put on the Income Statement and the Balance Sheet?

I know this is a bit of a beginning question, but just looking for some guidance here. Any help would be appreciated.

Tracy
Tomcat82
@2014-04-12 09:20:08
Actually calculating revenue to be recorded on the income statement is pretty easy. Cost this period/total cost = % of total revenue to be recorded. So if total expected revenue over the life of the entire project is estimated to be \$1,000, and you incurred costs which are 20% of total expected costs, you record 20% of expected revenue on the income statement, which is \$200 (\$1,000*.2) in this example. COGS you already have. Those are the costs incurred this period. Hope this helps, and hope I'm right (lol)
Belmataverde
@2014-08-14 20:53:42
Hi? Am I late? hehe.
Firs to all you need to fully understand 8 things.

1. Contract Price - Normally it's a fixed price and sometimes will increase depends on the variation order.

2.Total Cost to Date (Cumulative Cost) - this is the accumulated cost to date

3. Estimated Cost to Complete - this is the future cost to make the project complete.

4. Total Estimated Cost at Completion - this is the sum of total cumulative cost to date + estimated cost to complete

5. Estimated Profit at completion - equals to Contract Price Less Estimated Cost to Complete.

6. Total Profit Recognized to Date - Accumulated profit recognized to Date

7. Progress billing - This account will move only when we issue an invoice to our client. It does not have any direct relationship for transactions that affecting work in progress account. But at the project, this should be equal to construction in progress account. Which is equal to the contract price.

8. Construction in Progress - this is the account is composed of cumulative cost to date + cumulative "profit" recognized to date. At the end of the project, this should be equal to progress billing. At the end of the project, this should be equal to progress billing too.

How to know the revenue.
1. What is the contract price?

2. What is our percentage of completion to Date? ( Total Cost to Date / Total Estimated Cost at Completion)

3. How much revenue we will recognized to date based on the percentage we have completed? ( # 1 multiply by # 2)

4. How much revenue for this month? ( # 4 less previous month's # 4)

How to know the profit

1. What is our contract price?

2. How much is the total estimated cost of the project upon completion? ( cost to date + estimated cost to complete)

3. How much is our estimated profit AT COMPLETION?

4. What is our percentage of completion TO DATE? ( Total Cost to Date / Total Estimated Cost at Completion)

5. Then how much would be our profit TO DATE based on the percentage we have completed? ( #3 multiply by # 4)

6. Then how much profit for this month only? (# 5 less #5 of last month)