Definition
The cost-to-cost method is an input method for measuring progress toward satisfying a performance obligation over time. Progress equals cost incurred to date divided by total expected cost. ASC 606-10-55-20 and 55-21 describe input methods and require adjustment when an input does not depict the transfer of control, for example costs from inefficiency or wasted materials, or uninstalled materials that are not specific to the contract.
Why it matters in an audit or review
Revenue depends on the estimate of total cost, which is management's judgment and the most sensitive input on long-term contracts. Auditors test the estimate to complete against vendor quotes, subcontract commitments, and subsequent actual costs, and recompute percent complete. They also test whether costs incurred are properly cut off and whether any costs should be excluded from the measure.
Example
Illustrative: transaction price $2,000,000, estimated total cost $1,600,000, cost incurred $400,000. Progress is 25% ($400,000 / $1,600,000), so revenue to date is $500,000. If the estimate rises to $1,800,000, progress falls to about 22.2% and cumulative revenue to about $444,400, so the cumulative catch-up reduces revenue in the period of the change.
Common mistakes
- Including costs of deposits on materials not yet installed.
- Not updating the estimate after known price increases.
Sources
- FASB ASC 606-10-25-31 through 25-37, measuring progress
- FASB ASC 606-10-55-16 through 55-21, methods for measuring progress
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error