This chapter explains what WIP-based product costing is and how it works.
Video - Product Costing Overview
Absorbed Costs Screenshot Series
Manufacturing has special accounting requirements
It is a requirement to reflect the cost of material, labor, manufacturing overhead, and subcontract services into the value of the items that you manufacture. All costs must flow through Work in Process into Inventory Value and ultimately get reflected in your Cost of Goods Sold when you sell the product.
What is WIP-based product costing?
WIP-based product costing refers to all general ledger transactions associated with job costing, WIP value, and inventory value.
All product costing transactions are job-related
All product costing transactions are made when the following job processes are performed – job issues, job labor, job subcontract receipts, job receipts, and job close.
Job Issues
Materials are issued to jobs in real time when needed by work centers at each components inventory cost for the quantity issued. This results in a debit (increase) to Work in Process and a credit (decrease) to Inventory.
Job Labor
Job labor hours, which can be actual or standard hours (recommended), are entered against jobs in as close to real time as possible at each work center’s hourly rates for labor and manufacturing overhead. This results in debits (increase) to Work in Process and credits to Absorbed Labor and Absorbed Mfg OH.
Hourly Rates
Work center hourly rates for direct labor and manufacturing overhead are derived from the Shop Rates screen, which calculates suggested hourly rates at the total shop level based on past labor hours divided into past labor and overhead costs. These two shop rates can be factored up or down by work center to reflect exceptions in relative labor rates or share of overhead burden. See the Absorption Costing and Shop Rates chapter for details.
Job Subcontract Receipts
POs for outside services performed during the course of jobs – such as painting, plating, and heat-treating – are received and charged to jobs at the PO cost. This results in a debit (increase) to Work in Process and a credit to Absorbed Subcontract Cost.
Job Receipts
Finished items are received to inventory and averaged with quantities on hand to establish inventory value. This results in a debit (increase) to Inventory and a credit (decrease) to Work in Process. Job Receipt provides the means by which material, labor, subcontract services and manufacturing overhead are absorbed into item inventory costs.
Job Close
When a job is closed, its WIP balance is brought to zero by adjusting the WIP account up or down to account for any variance between the total actual job cost and the total job receipt cost to inventory. This results in a debit or credit to Work in Process and an offsetting debit or credit to WIP Adjustments.
Total WIP value is self-adjusting and always in balance
The total value of the Work in Process account reflects the current WIP balance of all jobs in progress at any given time. Whenever a job is closed, its WIP balance is adjusted to zero and thus the overall Work in Process account value is always in perfect balance with the underlying jobs in progress.
The WIP account is never adjusted by journal entry
Because it is self-adjusting, you never make journal entries to the Work in Process account. Any such journal entry will corrupt the account and cause it to be out of balance with the WIP balances in the underlying jobs in progress.
The Inventory account is never adjusted by journal entry
The Inventory account is also self-adjusting and is never subject to journal entry except to establish its initial value on system startup. When manufactured items are received to inventory, the cost reflects labor, subcontract services, and manufacturing overhead and thus needs no further adjustment. Any cost adjustments are made at the item level through the Change Inventory Cost screen and never by journal entry.
WIP-based product costing is totally automated
By contrast to the numerous workarounds required with a non-WIP system, WIP-based product costing is totally automated and occurs in the background as job transactions are made.
