Cumulative example – the determination of contract revenue and expenses
The following example illustrates the determination of the stage of completion of a contract and the timing of the recognition of contract revenue and expenses, measured by the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs.
A construction contractor has a fixed price contract to build a bridge. The initial amount of revenue agreed in the contract is €9,000. The contractor’s initial estimate of contract costs is €8,000. It will take 3 years to build the bridge.
By the end of year 1, the contractor’s estimate of contract costs has increased to €8,050.
In year 2, the customer approves a variation resulting in an increase in contract revenue of €200 and estimated additional contract costs of €150. At the end of year 2, costs incurred include €100 for standard materials stored at the site to be used in year 3 to complete the project.
The contractor determines the stage of completion of the contract by calculating the proportion that contract costs incurred for work performed to date bear to the latest estimated total contract costs. A summary of the financial data during the construction period is as follows:
|
Year 1 |
Year 2 |
YEAR 3 € |
|
|
Initial amount of revenue agreed in contract |
9,000 |
9,000 |
9,000 |
|
Variation |
– |
200 |
200 |
|
Total contract revenue |
9,000 |
9,200 |
9,200 |
|
contract costs incurred to dare |
2,093 |
( 168 |
8″700 |
|
Contract costs to complete |
5,957 |
2,023 |
– |
|
Total estimated contract costs |
8,050 |
8,200 |
8,200 |
|
Estimated profit |
950 |
1.000 |
1,000 |
|
Stage of completion |
26% |
74% |
100% |
The constructor uses the percentages calculated as above to calculate the revenue, contract costs and profits over the term of the contract. The stage of completion for year 2 (74%) is determined by excluding from contract costs incurred for work performed to date the €100 of standard materials stored at the site for use in year 3.
The amounts of revenue, expenses and profit recognised in profit or loss in the three years are as follows:
|
To date |
Recognised in prior years |
Recognise in |
|
|
Year 1 |
|||
|
Revenue (9,000 x 26%) |
2,340 |
2,340 |
|
|
Expenses |
2,093 |
2,093 |
|
|
Profit Year 2 |
247 |
247 |
|
|
Revenue (9,200 x 74%) |
6,808 |
2,340 |
4,468 |
|
Expenses (6,168 incurred less 100 of materials in storage) |
6,068 |
2,093 |
3,975 |
|
Profit |
740 |
247 |
493 |
|
Year 3 |
|||
|
Revenue (9.200 x 100%) |
9200 |
6808 |
2197 |
|
Expenses |
8,200 |
6,068 |
2,132 |
|
Profit |
1,000 |
740 |
260 |
Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.
You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.
Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.
Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.
