Percentage of Completion Method (COGS)

The Percentage of Completion method is used for long-term construction and other projects. This method allows you to recognize the revenues and expenses periodically, during the contract period, prior to the completion of the project/contract. As a result, you can estimate the project's future costs at the end of each reporting period in order to estimate the total gross profit to be earned on the project.

You can use this method to calculate the cost of goods sold (COGS) when the Percentage of Completion is used as the revenue recognition method.

Calculation of COGS

COGS = Percentage Complete * Estimate at Completion(EAC)

Revenue recognized = Percentage Complete * Contract Amount

When calculating the COGS, LN also considers the loss component. In which case:

COGS = Revenue + Loss; where in Loss = Contract Amount - EAC
Note: For extensions, the percentage completed value must be specified manually because EAC is not defined for extensions.

Levels at which the COGS can be recognized:

  • Contract
  • Project

Constraints

  • The revenue recognition method must be Percentage of Completion.
  • When the revenue recognition method is Percentage of Completion, the Method can be Profit Percentage or Percentage of Completion.
  • When the Method is Profit Percentage, the Percentage of Completion value specified for the COGS is not used to calculate COGS.
  • When the Method is Percentage of Completion, the Percentage of Completion value for the COGS is based on the Percentage of Completion value calculated for the revenue to be recognized.
  • The Percentage of Completion value for the COGS can only be modified/ calculated for the existing revenue data.