The seventh essential process for manufacturing efficiency is to use WIP-based costing to operate with complete cost profiles and accurate costs of goods sold.
All manufacturing companies have the same challenge
All manufacturing companies have the same challenge when it comes to product costing – how can labor, overhead, and subcontract services be incorporated into product costs? Only with complete cost profiles can you make good pricing and product decisions.
The Shop Rates screen is used to calculate hourly rates
The Shop Rates screen is used to calculate hourly rates for labor and manufacturing overhead that get applied to your work centers.
Hourly rates can be factored in the Work Centers screen
In the Work Centers screen you can factor hourly shop rates up or down to account for differences in work center personnel and overhead consumption.
The Cost Rollup calculates estimated costs for M items
The Cost Rollup screen is used to roll the costs of material, labor, overhead, and subcontract services up through all levels of your product structures to calculate a total estimated cost for each of your manufactured items. This is especially useful with one-off custom items because you can then apply a markup over cost to furnish a price to the customer.
An estimated job cost is calculated when jobs are created
Whenever a job is created, the program calculates an estimated job cost, which can be viewed in summary or detail fashion within the Job Inquiry.
What is WIP-based product costing?
WIP-based product costing is the process by which job costs are accumulated and absorbed into the inventory cost of finished items.
Absorbed job costs are applied to job receipts
When finished quantities are entered in the Job Receipts screen, the program calculates the total unit job cost for you, which includes material, labor, overhead, and subcontract service costs. The calculation can be at actual or estimated job cost, depending on the system setting in the Job Cost Basis screen. Job receipt costing is the means by which all these cost elements get absorbed into item inventory values, which flow through to cost of goods sold when items are shipped and invoiced.
WIP gets balanced with job close
Jobs are closed in this screen. As each job gets closed, your WIP account gets automatically balanced. Any difference between job input and output costs gets posted to a WIP Adjustment variance account.
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 self-adjusting with no period end procedures
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 self-adjusting with no period end procedures
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.
Boosting your manufacturing efficiency
Using WIP-based product costing is an essential element in boosting your manufacturing efficiency. Instead of operating in the dark with incomplete product costs, you will be furnished with estimated and actual product costs that reflect material, labor, overhead, and subcontract services, along with self-adjusting Inventory and WIP accounts.
What to Do
Review shop rates once per month
Review the variances for direct labor and shop overhead once per month for an appropriate date range (3 months minimum) in the Shop Rates screen and adjust your shop rates as needed if you sense that an absorbed cost variance is trending in any direction away from actual costs.
Perform cost rollups at frequent and regular intervals
Roll up estimated costs at frequent and regular intervals to insure that estimated job costs reflect current work center rates and component costs. Run a mass update to purchase item costs in the Estimated Purchase Costs screen at least once per month and run a batch rollup in the Cost Rollup screen at least once a week.
Receive finished items at a realistic cost
When finished items are received to inventory in the Job Receipts screen, always make sure the unit cost is realistic, meaning that it is within acceptable range to the estimated job cost and is not affected by an obvious costing error.
What Not to Do
Never attempt to adjust past costs
Even when large variances are reported in the Shop Rates screen, never attempt to adjust past costs by reopening jobs or reversing invoices or any other means. These are harmful practices that do not work and cause numerous accounting problems. Large variances are properly handled by variance accounts and do not require correction. Past labor and overhead costs are usually in closed accounting periods and have long ago been co-mingled with other costs and absorbed into the cost of other items.
Never make journal entry adjustments to your Inventory account
Never make journal entry adjustments to your Inventory account. This is a self-adjusting account that is always fully reconciled with the total inventory value of stock on hand.
Never make journal entry adjustments to your Work in Process account
Never make journal entry adjustments to your Work in Process account. This is a self-adjusting account that is always fully reconciled with underlying job costs.
Do not devise your own costing method
WIP accounting is not compatible with any other costing method. If you are accustomed to some other method in your previous system, do not attempt to replicate it in any form or fashion within DBA.
Do not use the sales order for costing or planning
Do not use the sales order for costing or planning purposes. This practice yields false numbers, promotes inefficient job planning, and compromises the integrity and effectiveness of DBA’s WIP accounting system. Sales orders should only be used to establish sales demand in terms of quantities and required dates and to establish selling prices.
