Boeing 2010 Annual Report Download - page 55

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Due to the size, duration and nature of many of our contracts, the estimation of total sales and costs
through completion is complicated and subject to many variables. Total contract sales estimates are
based on negotiated contract prices and quantities, modified by our assumptions regarding contract
options, change orders, incentive and award provisions associated with technical performance, and
price adjustment clauses (such as inflation or index-based clauses). The majority of these contracts
are with the U.S. government. Generally the price is based on estimated cost to produce the product or
service plus profit. Federal acquisition regulations provide guidance on the types of cost that will be
reimbursed in establishing contract price. Total contract cost estimates are largely based on negotiated
or estimated purchase contract terms, historical performance trends, business base and other
economic projections. Factors that influence these estimates include inflationary trends, technical and
schedule risk, internal and subcontractor performance trends, business volume assumptions, asset
utilization, and anticipated labor agreements.
The development of cost of sales percentages involves procedures and personnel in all areas that
provide financial or production information on the status of contracts. Estimates of each significant
contract’s sales and costs are reviewed and reassessed quarterly. Any changes in these estimates
result in recognition of cumulative adjustments to the contract profit in the period in which changes are
made.
Due to the significance of judgment in the estimation process described above, it is likely that
materially different cost of sales amounts could be recorded if we used different assumptions or if the
underlying circumstances were to change. Changes in underlying assumptions/estimates, supplier
performance, or circumstances may adversely or positively affect financial performance in future
periods. If the combined gross margin for all contracts in BDS for all of 2010 had been estimated to be
higher or lower by 1%, it would have increased or decreased pre-tax income for the year by
approximately $319 million. A number of our contracts are in a reach–forward loss position. Changes
to estimated loss in future periods are recorded immediately in earnings.
Program Accounting
Program accounting requires the demonstrated ability to reliably estimate the relationship of sales to
costs for the defined program accounting quantity. A program consists of the estimated number of units
(accounting quantity) of a product to be produced in a continuing, long-term production effort for
delivery under existing and anticipated contracts. The determination of the accounting quantity is
limited by the ability to make reasonably dependable estimates of the revenue and cost of existing and
anticipated contracts. For each program, the amount reported as cost of sales is determined by
applying the estimated cost of sales percentage for the total remaining program to the amount of sales
recognized for airplanes delivered and accepted by the customer.
Factors that must be estimated include program accounting quantity, sales price, labor and employee
benefit costs, material costs, procured part costs, major component costs, overhead costs, program
tooling costs, and routine warranty costs. Estimation of the accounting quantity for each program takes
into account several factors that are indicative of the demand for the particular program, such as firm
orders, letters of intent from prospective customers, and market studies. Total estimated program sales
are determined by estimating the model mix and sales price for all unsold units within the accounting
quantity, added together with the sales prices for all undelivered units under contract. The sales prices
for all undelivered units within the accounting quantity include an escalation adjustment that is based
on projected escalation rates, consistent with typical sales contract terms. Cost estimates are based
largely on negotiated and anticipated contracts with suppliers, historical performance trends, and
business base and other economic projections. Factors that influence these estimates include
production rates, internal and subcontractor performance trends, customer and/or supplier claims or
assertions, asset utilization, anticipated labor agreements, and inflationary trends.
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