CCA Construction Cost Principles & Accounting 2 — Questions and Answers
Question 1: Under the percentage-of-completion method, how is revenue recognized on a long-term construction contract?
- Entirely when the project reaches substantial completion
- In proportion to the costs incurred relative to total estimated costs (Correct answer)
- Evenly over the contract duration regardless of progress
- Only when the owner issues a certificate of payment
Correct answer: In proportion to the costs incurred relative to total estimated costs
The percentage-of-completion method recognizes revenue based on the ratio of costs incurred to date versus total estimated contract costs.
Question 2: A construction company overbills a client $200,000 relative to actual work completed. This amount is recorded as:
- Accounts receivable
- Underbillings (costs in excess of billings)
- Overbillings (billings in excess of costs) (Correct answer)
- Deferred revenue on the balance sheet only
Correct answer: Overbillings (billings in excess of costs)
Billings that exceed the revenue earned to date are classified as overbillings, a current liability representing the obligation to perform future work.
Question 3: Which cost classification best describes the wages of a site superintendent who oversees multiple projects simultaneously?
- Direct labor
- Indirect labor (Correct answer)
- Selling expense
- General and administrative expense
Correct answer: Indirect labor
Costs that cannot be traced directly to a single project, such as a multi-project superintendent, are classified as indirect labor.
Question 4: A contractor's estimate-at-completion (EAC) exceeds the original contract price. Under GAAP, the contractor must:
- Defer recognition of the anticipated loss until the project closes
- Recognize the full anticipated loss immediately in the current period (Correct answer)
- Spread the loss over the remaining contract duration
- Disclose the loss only in the financial statement footnotes
Correct answer: Recognize the full anticipated loss immediately in the current period
GAAP requires immediate recognition of the entire anticipated loss on a loss contract in the period it becomes evident.
Question 5: Which of the following is an example of a period cost in construction accounting?
- Concrete materials purchased for a specific project
- Subcontractor costs billed to a job
- Corporate office rent unrelated to any project (Correct answer)
- Equipment rental charged directly to a contract
Correct answer: Corporate office rent unrelated to any project
Period costs, such as corporate office rent, are expensed in the period incurred rather than allocated to specific contracts.
Question 6: When auditing job cost reports, the primary risk associated with the direct-costing method is:
- Over-allocation of fixed overhead to projects
- Omission of fixed overhead from project cost data (Correct answer)
- Misclassification of period costs as assets
- Understatement of variable costs on each job
Correct answer: Omission of fixed overhead from project cost data
Direct costing excludes fixed overhead from job costs, which can lead auditors to underestimate the true total cost of a project.
Question 7: In a guaranteed maximum price (GMP) contract, cost savings below the GMP are typically:
- Retained entirely by the owner
- Shared between owner and contractor per the contract terms (Correct answer)
- Applied to a contingency reserve for future projects
- Forfeited to the surety
Correct answer: Shared between owner and contractor per the contract terms
GMP contracts typically include a shared savings clause whereby cost underruns are split between the owner and contractor according to agreed percentages.
CCA Construction Cost Principles & Accounting 2
Under the percentage-of-completion method, how is revenue recognized on a long-term construction contract?