Case Analysis : Aerospace And Transport Planes Industry

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Background of the case: LabCo is a construction firm that customizes and manufactures large, industrial machinery and equipment and sell to its customers. Its customers include Aerospace and Transport Planes industry. LabCo negotiates a contract with its customers on either a fixed-price or cost-plus basis. The company 's accounting policy to recognize revenue outlines that revenues and fees are recognized using the percentage-of-completion method, which is based on contract costs incurred to date compared with total estimated costs at completion. The other policy that they use is the completed-contract method, which is used when reliably dependable estimates of the total costs to be incurred under a specific contract cannot be made. LabCo enters into contract trouble with one of its customer, Halibut, whom asks Labco to build a six-axis laser cutting machine which requires lots of performance specification. LabCo uses the percentage-of-completion method to record the relevant revenue and expense of the contract. The problems that LabCo encounters, including redesigning, outsourcing engineering costs, and steel price changing, which led LabCo to re-estimate for the overall cost to complete the contract. The result shows that the contract costs would exceed the total contract value. Due to the failure of the machine performance, LabCo is required to redesign and remedy the problems with the machine. Upon the problems with the Halibut contract, LabCo is

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