Closing Jobs (Jobs >Job Control Panel > Close Jobs) in a timely manner is an essential step in reconciling your Work in Process and overall Cost of Sales.
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 job input costs and the total job receipt output costs. This results in a debit or credit to Work in Process and an offsetting debit or credit to WIP Adjustments (Cost of Sales).
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.
All Jobs must be closed in a timely manner
The goal should be to Close your Jobs as close to your Finish Date as possible. This will align your WIP Adjustment (Cost of Sale) value more closely with your final job receipts to inventory.
All Jobs must be closed, without exception
Some companies delay or avoid closing Jobs with a large WIP Adjustment value. This is not the correct approach. The transactions that created this adjustment value (Job input costs versus Job output receipt costs) have already occurred in the system. The WIP Adjustment (Cost of Sale) posting is the correction to your overall Cost of Sales that is required to balance out your system.
Will a large WIP Adjustment value adversely affect my profitability on the Income Statement?
No. Your overall Cost of Sales will be correct and will be neutral with regards to your profitability. Lets look at an example of a Job for a Qty of 100 that had a Job Estimate of $1.00 per unit and the Job was received at $10.00 per unit by accident. This led to Inventory value being overstated by $900. The WIP Adjustment (Cost of Sales) - Variance value is $900 in the Job Control Panel - Close Job screen due to the receipt cost being $900 more than the input costs for the job.
Scenario 1 - The item was picked and shipped immediately
If the product was immediately picked and shipped, the Cost of Goods Sold was inflated by $900. When the Job is Closed, the WIP Adjustment (Cost of Sales) for $900 would offset the Cost of Goods Sold and the overall net affect on your Cost of Sales would be zero.
Scenario 2 - The inflated value was discovered in Inventory and adjusted via Change Inventory Value
In this case, it was discovered that the inventory value was much higher than usual. Prior to any transactions were made, the unit cost was adjusted from $10.00 to the correct value of $1.00 in the Change Inventory Cost screen. This would create a Cost of Sales entry into the Inventory Adjustment Account (Cost of Sales). When the Job is Closed, the WIP Adjustment (Cost of Sales) for $900 would offset the Inventory Adjustment (Cost of Sales) $900 and the overall net affect on your Cost of Sales would be zero.
When can I correct Job Costs for Finished Jobs?
You have a very limited window of opportunity to correct your Job costs after your have completed your final job receipt and Finished a Job. If you recently finished the Job, it is in the same accounting period, and all of the quantities are still in inventory, you can reverse your Job Receipts and correct the Job costs and re-receipt the Job. For almost all other scenarios, it is best to Close the Job and post the WIP Adjustment (Cost of Sales) value to offset the transactions that have already occurred.
How to minimize costing errors
Attempting to fix costs after the fact is a very frustrating process, especially once the item has been sold/issued and is no longer in inventory. The best way to improve your costing, is for your company to take a pro-active approach and eliminate errors altogether. Here are some tips for success:
Prior to Job Creation
▪Verify your supplier prices when you send out your Purchase Orders (MRP > PO Generation > Supplier Sources)
▪Regularly update your purchased items estimated costs (BOM > Estimated Purchase Costs) based on your default supplier prices
▪Update your Routing cycle times to reflect reality on an ongoing basis
▪Periodically (ie Quarterly) review your Shop Rates for Labor and Mfg Overhead
▪Regularly rollup your estimated costs for your manufactured items (BOM > Cost Rollup > Batch All)
After Job Creation
▪Always review your Job Costs (Jobs > Job Inquiry) prior to Job Release (Job Control Panel - Job Release) to ensure that your estimated job costs are reasonable
▪Perform material issues in real time (Jobs > Work Center Schedule - Material - Job Issues)
▪Report labor as sequences are completed (Jobs > Work Center Schedule - Labor - Job Labor)
▪Job Receipt Unit Cost establishes Inventory Cost (Jobs >Job Receipt)
▪Make sure all job transactions are completed and the Job Receipt statuses (Sequence, Hours, Issues, Subcon) are colored green prior to performing the final receipt
▪Pay special attention to the Unit Cost and WIP Balance value at final receipt
▪Close Jobs (Job Control Panel > Job Close) immediately after final Job Receipt to balance out your overall Cost of Sales
