The Cost recovery method is an accounting process in which a business recognizes income from a sale transaction only after the cost element of that sale has been collected from the customer in cash. The method is a component of accrual accounting, which is the basis of most modern business transactions. Using this method, businesses can better estimate the amount of profits they will earn for each project by accurately measuring the actual cost that has been incurred to complete the work. This is especially useful for companies that sell their products or services on credit to customers.
In addition, the cost recovery method can help to defer taxes that a company owes for its profits by reducing the amount of tax it has to pay until the profits are actually earned. This way, a company can keep more of its profits for itself and its employees until it has received the full payment from its clients. This method can also help a company to lower its taxes, which in turn can improve the bottom line of its operations and result in greater profits for the company.
Aside from the costs of equipment and other essential materials that are used for a project, there are also many other expenses that a company might incur in completing a job. These include the salaries of workers, transport charges, insurance, utilities, and other miscellaneous costs. These expenses are then added together to determine the total project cost. Once the total project cost has been determined, it is then subtracted from the final product or service to calculate the gross profit.
As a rule, all the costs that a company incurs should be reflected in its financial statements. However, some of these costs can be a little difficult to track down. This is because these costs can sometimes be hidden within the overall costs of a project. The most important thing to do when calculating the profitability of a project is to make sure that all the direct and indirect expenses have been included. This will ensure that the final product or service is being sold at a reasonable price.
For departments that provide services to outside customers such as Spartan Shops, the City of San Jose or Sororities/Fraternities, please see the Integrated CSU Administrative Manual on Cost Allocation/Recovery for more information on how to bill these activities. If you have questions about billing procedures or a specific activity, please contact Accounting Services. The ICSUAM also describes how to determine whether to use a single rate that covers both owning and operating costs or two separate rates for each. The rate that is selected will affect how much the department needs to charge its customers. It is recommended that each department develop a cost allocation plan to ensure the accuracy of its charges. The plan should be reviewed annually by the Chief Financial Officer.