# Here's an Example Illustrating the Percentage Completion Method

An accounting method, percentage of completion is used to evaluate the cost of ongoing long term projects by computing the cost of the project in the current fiscal year. This method to ascertain cost has a very effective formula for all construction projects.

BusinessZeal Staff

Last Updated: May 31, 2018

Such one time projects however have a different approach of costing. The cost and profit of the project is basically ascertained in a different manner, which is known as percentage of completion which, in some cases, is also expressed as PoC. The basic principles of cost accounting are also followed in this method of accounting, however timeline and treatment of cost is a bit different.

**Percentage of Completion: Formula**

This is basically a part of the revenue recognition concepts of the International Financial Reporting Standards (IFRS). The premise which qualifies a said project needs to be a one unit project such as a construction project. The transaction between the project giver and the party executing the project is conducted on the basis of this formula. The general formula for the method goes as follows:

*Cumulative revenue (Percentage of Completed Method Cost) =*

Cost Incurred to Date x Contract Price/ Total Estimated Price of the Contract...(General Formula)

Cost Incurred to Date x Contract Price/ Total Estimated Price of the Contract

This formula, however, is quite impractical as it does not tell us anything about the completion percentage of the project. Hence in construction, there is a detailing of the cost that is used:

The first step to computation is ascertaining the percentage of completion, the formula goes as follows:

*Percentage completed (%) = Costs Incurred (to date) / total estimated or allocated cost of production x 100*...(1)

In some cases, cost is not used as it can give a certain misleading image, hence time is use as the ascertaining element. Further more, some companies also derive the two percentages and simultaneous consider both. Next step is of gross profit.

*Gross profit (till date) = percentage completed x total estimated gross profit*...(2)

*Current Year's Gross Profit = Total Gross Profit (till date) - Prior Gross Profit*...(3)

If the project is a contract from one party to another then either the general formula is utilized to conduct periodic payment, or the formula (1) is used. The usage of the formula differs as per the subject and context of use. There are several detailed provisions and adjustments such as inflation and profit addition or extra material acquisition costs, which are further considered.

**Example of Percentage of Completion Method**

Here's an example to further illustrate the method.

*Case 1*

Ascertainment of payment from party 1 to 2 is done on the basis of the general formula.

- Cumulative revenue (Percentage of Completed Method Cost) = Cost Incurred to Date x Contract Price / Total Estimated Price of the Contract
- Cumulative revenue = $20,000 x $100,000 / $80,000 = $25,000

*Case 2*

The cost and completion of cost is ascertained.

- Percentage completed (%) = Costs Incurred (to date) / total estimated or allocated cost of production x 100
- Percentage completed (%) = 30,000 / 120,000 x 100 = 25%
- Gross profit (till date) = percentage completed x total estimated gross profit
- Gross profit (till date) = 25 / 100 x 200,000 = 50,000
- Current Year's Gross Profit = Total Gross Profit (till date) - Prior Gross Profit
- Current Year's Gross Profit = 50,000 - 20,000 = 30,000