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I brought the official textbook from BPP. There is very little detail about the output method in the textbook. When I watched the video from Opentution, I was wondering about the accounting treatment.
In example 7 (Noah’s company) in the video, the cost recognised in SPL is $43,200. However, the question mentioned that the cost incurred was $52,000. Why the cost was UNDERESTIMATED under the output method? I don’t think it made any sense.
Can you explain more about the difference of $8,800 ($52,000-43,200). The incurred cost won’t show on the SPL. Is it ridiculous?
The costs that have been incurred might not necessarily have been used as part of the contract, so the company could have purchased materials (say) but they have not yet been used this period to generate revenue, hence not recognised in profit or loss.
The extra costs will be recognised as part of the contract asset on the SFP.