ED. You're welcome. I don't know about well informed...the goals are just truthful and interesting (even if only to me sometimes).
I need to make an assumption in order to respond to your latest hypothetical...I hope it's accurate.
re: "2. We build them a tool and send them samples for approval/buyoff before starting full production."
My assumption is that your customer owns the tool that you build on their behalf. So it is THEIR accounting that we're talking about.
Also re: "6. Production resumes but with a totally different cost basis than originally planned" it should be noted that unit production costs don't neatly convert into the way those costs are accounted for in the financial statements.
You bill the customer for the original tool. They record its cost as an asset. They anticipate writing it off over either its own life or the product's life (obviously the tooling for the body of the 2012 Ford Taurus shouldn't continue to be a Ford asset in 2016 even if the tooling itself is still perfectly usable). When I say "writing it off" I am talking about how it is (or can be) considered an inventory cost and charged to Costs of Sales. Otherwise it could simply be depreciated like any other piece of equipment.
As they receive product from you they add it to their Inventory value based on what you charge to provide it.
"some aspect of the design was overlooked and the tool needs to be modified to an updated design"
Since it's not an accounting issue (and we REALLY don't want to talk about insurance companies and lawyers here) I'm going to pretend that we don't care whose fault that was.
The old tool needs to be tossed and the customer needs to account for its disposition...its value is now zero. If the old production is actually useless and needs to be tossed as well, that also needs to be accounted for. Depending on its materiality the customer could include those dollars as Costs of Sales. Ford would probably do that with a tail light lens problem, but a small company with limited revenues and a limited product offering could justify treating the issue as an extraordinary event and call it an Other Expense. If that actually happened to a small company it would be proper for that event to be described in the text portion of its reporting and the disposition costs would be described as something other than a "Loss on writedown of obsolete inventory", which indicates an obsolescence that mischaracterizes the reason for the charges.
Your company secures the new tooling, bills the customer for it, and they account for it and the production as above.
"So my question is how fuzzy could the accounting of that fairly expensive scenario get."
I hope that the Ford vs microcap comment above addresses that. It's not JUST an accounting issue. It's also a transparency issue that is a function of its materiality to the reporting company. It can't possibly be argued that a $211k charge is not material to a company that reports $252k in revenues in the same quarter. It needs to be clearly explained.
Sometimes common sense must apply. The company reported Costs of Sales of $115K in the quarter. If it included that $211K charge in Costs of Sales it would have resulted in a negative Gross Margin of <$74K>.
Accounting CAN be fuzzy even in the face of common sense, but not without an explanation and none was provided here. It would be interesting to know if your real life based hypothetical has any application to what happened here. But it's not something that we should have to guess about.
(I thought that the PS might have been related to something other than my interpretation of it...thanks for the clarification)
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