Question in regards to Percentage of Completion

[igolynkin]

The solution given is: The correct answer is a: Percent complete: 2012: 50% [$1,100,000 (cum. costs incurred) / $2,200,000 (Estim. costs to complete)]; 2013: 83.33% [$2,000,000 (cum. costs incurred) / $2,400,000 (Estim. costs to complete)]. Cumulative revenue recognized: 2012: $1,500,000 ($3,000,000 × 50%); 2013: $2,500,000 ($3,000,000 × 83.33%). Cost incurred in 2013: $900,000 ($2,000,000 - $1,100,000). Thus, 2013 profit recognized = $1,000,000 ($2,500,000 - $1,500,000) - $900,000.


***My issue--

I do not understand why the problem was solved this way, and why it neglected the costs from year 2011. I also do not understand why they didn't add the actual costs incurred from prior years in their calculation for years 2012 and 2013, and skipping 2011 all together.

 

[mike99]

They have not neglected the costs in 2011. These costs are "included" in the 2012 figures, as the figures refer to "cumulative" contract costs, and not costs per year.

 

[Shippingthin]

Here is how 2011 was done:
200,000 / 2,000,000(200,000+1,800,000) = .1 or 10%
Revenue to date and for current year:
3,000,000 X .1 = 300,000
Cost to date and for current year:
200,000
Gross profit for current year:
300,000 - 200,000 =100,000

2012:
1,100,000 / 2,200,000(1,100,000+1,100,000) = .5 or 50%
Revenue recognized to date:
3,000,000 X .5 = 1,500,000
Revenue recognized for current year:
1,500,000 - 300,000(2011's) = 1,200,000
Cost to date:
1,100,000
Cost for current period:
1,100,000 - 200,000(2011's) = 900,000
Gross profit for current year:
1,200,000 - 900,000 = 300,000

Then do the same thing for 2013 but where i subtracted out 2011 above for 2012, you just subtract 2012's figures to date.

The numbers under Cumulative contract cost incurred are actually stacking because it's the total cost incurred up to those dates. So like cost actually incurred on 2013 isnt 2,000,000 it's 2,000,000 - 1,100,000 = 900,000. 2012's isnt 1,100,000 but 1,100,000 - 200,000 = 900,000. 2011 is just 200,000.

And it's called Percentage-of-Completion cause u're trying to find the percentage of work completed by using the % of cost incurred from total est. cost and applying it to the total est. revenue to see how much to recognize for ur completion.

Hope this helps a lil, my first time trying to help someone.

 

[Shippingthin]

I just realized the date he posted that, lol.