Completed production method accounting includes recognizing revenue as the products roll off the assembly line or are available for transportation and sale. This means that the production process is considered to be the final revenue generating activity. This occurs normally if a company convinces its customers to assume the transportation of the goods.
The use of the completed production method usually requires a contract with a customer to assume the responsibility of transportation of goods. The contract also needs to specify that the customer intends to buy the goods for a specified period of time. One normally uses production accounting services in raw material providers. Production accounting oil and gas is the largest industry that commonly uses the method. Other industries that use complete production services include lumber, coal, and steel.
For example, Tim is an accountant for an oil and gas production company called Texon Energy Inc. The company is responsible for several wells onshore. In addition, the company recently entered into a 5 year contract with Sea Shell Inc. Sea Shell will pay $65/barrel to Texon for 100,000 barrels each year. As a result, Tim uses the completed production method of accounting for all Texon transactions because it gives a more meaningful revenue count than the point of sale method.
Suppose that the company produced 120,000 barrels. If the company had used a Point of Sale (POS) Method, then the company would only be allowed to recognize $6.5 million. However, this is not reflective of the total output and would actually yield a higher Cost of Goods Sold (COGS). Under the completed production method, revenue would be recognized in the amount of $7.8 million. Notice: this is more meaningful to the company because it gauges output of the company. Unless the customer is leaning towards bankruptcy, the pay is guaranteed per the contract.