Question

In the construction industry, the percentage of completion (POC) method is the most common accounting method. Explain what business environments create favorable conditions for a company to use this POC method.

Answer 1

Percentage of Completion ( POC) - Revenues amd expenses in long- term contracts or projects are recognised as a percentage of work completed during a year.

Advantages which create a favourable conditions for a company to use POC :

1. Tax Benefits : The first and primary factor of this is tax benefit as it allows to report tax expenses basis on the completion of work unlike completion method where expenses isn't counted unless the work is not completed.

2. Allocates Cost and Expenses of a particular period:  It allocates cost and revenues of a paritcular period to the extent of *completion of work* and hence there is no wait till the project is completed to recognise income and exoenses of over all project.

3. Cost Saving Measures : Contractor's compensastion doesn't flucate with respect to changes in price of raw material and labour expenses. So it timely reports encourages the contractor to use time and cost saving measures to complete the project.

*Completion of work - ( % of the work to be completed in a given period)*estimated contract value

Though the above method can only be useful only and only if

1. Payments and collections of the company is assured

2. Accuracy in estimation and period of the project