Final answer:
An essential consideration in contracts involving multiple performance obligations is revenue recognition. Additionally, cost allocation is important in contracts with multiple performance obligations.
Step-by-step explanation:
An essential consideration in contracts involving multiple performance obligations is revenue recognition. Revenue recognition refers to the accounting principle that governs when and how a company recognizes revenue from its sales. In contracts with multiple performance obligations, revenue recognition helps to determine how and when revenue should be allocated to each specific obligation.
For example, if a company sells a product that includes both hardware and software components, it may need to allocate a portion of the revenue to the hardware and a separate portion to the software, based on their relative standalone selling prices.
Cost allocation is also important in contracts with multiple performance obligations. Cost allocation involves determining how costs incurred in the fulfillment of the contract should be allocated among the different obligations.