7 Replies Latest reply on Feb 25, 2013 7:03 PM by user633043

# Revenue Recognition using Cost-to-Cost (Percent Spent) method

Hi Dina/Krishna,

Please help me out in understanding the calculation as per costs to cost mapping with the example below.

Contract Value=100,000/- (inclusive of profit)
Profit Margin=25% => so i guess Cost Budget will be 75,000/-

Actual cost is incurred in four different stages:
1: Material delivery to customer=5000/-
2. Work Completion1=20,000/-
3. Work Completion2=10,000/-
4. Work Completion3=40,000/-

Please explain as how stage wise revenue is arrived using the cost-to-cost (percent spent) method. Although, i apply the formula [AC/BC*(BR-ER)]-AR, i am not able to interpret the results....request you humbly to help me out in understanding it. I have been breaking my head since long time to understand this.

This would of great help

Regards,
• ###### 1. Re: Revenue Recognition using Cost-to-Cost (Percent Spent) method
Hi

Phase 1: Percent spent= 5000/75000 = 6.666%
Revenue = 0.0666*100000 = 6666.67 USD
Phase 2: Percent spent = 25000/75000 = 33.33%
Accumulated Revenue = 33333.33 USD, Period Revenue amount = 26666.67 USD
Phase 3: Percent Spent = 35000/75000 = 46.67%
Accumulated revenue = 46666.67 USD, Period Revenue amount = 13333.34 USD
Phase 4: Percent Spent = 75000/75000 = 100%
Accumulated revenue = 100000 USD, Period Revenue amount = 53333.33 USD

Dina
• ###### 2. Re: Revenue Recognition using Cost-to-Cost (Percent Spent) method
Derivation of revenue amounts are correct, Dina provided the detail values with calculation breakups

Thanks
Krishna
• ###### 3. Re: Revenue Recognition using Cost-to-Cost (Percent Spent) method
Thanks Dina/Krishna,

Adding funding to it, i guess the funding would be cost. ie., funding for 75000/-

With that assumption am i right to derive the following revenue schedules which system would generate. Also, please help with the revenue amount that will be generated in the final schedule.

End of phase1: Funding Balance=70,000 Versus Periodic Rev=6666.67=>rev. generated for 6666.67
End of phase2: Funding Balance=45,000 Versus Periodic Rev=26666.67=>rev.generated for 26666.67
End of phase3: Funding Balance=10,000 Versus Periodic Rev=13333.34=>rev. generated for 10,000
End of phase4: Funding Balance=-65,000 Versus Periodic Rev=53333.333=>rev. generated for ?

Regards,
• ###### 4. Re: Revenue Recognition using Cost-to-Cost (Percent Spent) method
Hi

My previous response was based on the assumption that you have baselined the fund amount equal to the agreement amount. The revenue budget would also be 100,000, since revenue budget could be baselined only if it equal the fund allocated to that project.

If you fund only 70,000, the revenue recognition at each step will be 0.7 of the values I have mentioned.
The sysem multiply the percent spent by the value of revenue budget, i.e. the allocated fund.

Dina
• ###### 5. Re: Revenue Recognition using Cost-to-Cost (Percent Spent) method
Dina,

As mentioned in YOUR calculations, does the system take the accumulated cost at each milstone and generate the accumlated revenue ...

Is is not pssible for the system to take cost without accumlating it - individulally?

Thx
• ###### 6. Re: Revenue Recognition using Cost-to-Cost (Percent Spent) method
Hi

The system is summarizing all costs of the entire project and divide that amount by the total value of the approved cost budget.
The result is the percent spent.

This method is not tracking milestones completed, only cost spent.

Dina
• ###### 7. Re: Revenue Recognition using Cost-to-Cost (Percent Spent) method
i guess i messed it up a bit ...

my question was on percent complete method, where the event rev. and existing rev. are taken out at every percent complete revenue calculation

why is it so.

if i consider my Tt. rev as 100 then percent complete goes this way..
event rev.=25; percent complt=5% ---> rev=0.05(100-25)-0 = 3.75
event rev=0; percent complt=10%------>rev=0.10(100-0)-3.75 =6.25
event rev=20;percent complt=20%----->rev=0.20(100-20)-6.25 =9.75

As per oracle, why the event rev. and previous revenue is taken out at every revenue recognition ?

ideally, it shud be..
5%(100) = 5
10%(100) = 10
20%(100)= 20
so and so far..

Thx