Chapter 9 pointed to potential quality issues with program accounting. This accounting is applied for production of goods that take several years to build, like ships and, in the case of Boeing, commercial and defense aircraft. Production costs are accumulated in inventory as production proceeds. However, if it is estimated that the costs will not be recovered, the inventory is written down. Chapter 9 reported that Boeing made substantial write-downs in 2020 and 2021 with production delays on its 777X program. They referred to them as “reach-forward losses.” In $ millions:
Recognizing anticipated losses is good conservative accounting. However, there is something else to watch out for: If and when the planes are delivered and revenues recognized, cost of goods sold will be lower and profit margins higher because production costs have been written off. Those margins will not be because of reduced production costs but because of the earlier write-off. In 2020, although production proceeded with costs incurred, Boeing reported that production costs in inventory were near zero because of the write-off. So the cost of planes produced that year will have zero cost of goods sold when sold.