Software Solutions produces inventory-tracking and supply-chain management software that it sells to large commercial clients. Its main software packages sell for an average of $130,000 each and require the company to customize the programs to suit each buyer's organization and operations. There is no additional charge for this customization service, as it is included in the initial selling price.
The customization work is done by a special team of employees, usually takes several months to complete, and involves significant costs for Software Solutions, averaging $25,000 per sale. If the buyers had to pay for this customization work, the normal charge would average $40,000 per sale.
Aside from the customization work, the company's cost for each software package sold averages $50,000.
Required:
a. Discuss appropriate accounting treatments for handling the income measurement issues that arise in this type of situation. Describe at least two alternative approaches that could be taken.
b. Indicate what approach would be appropriate in each of the following situations:
i. The company wants to treat the software customization unit as a "cost centre.' In other words, the customization team is expected to control its costs, but not to generate a profit.
ii. The company wants to treat the software customization unit as a "profit centre." In other words, the customization work is viewed as a profit-generating line of business, separate from the software sales unit.