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This chapter explains how WIP-based product costing works when finished items are received to inventory and jobs are closed.  

Key Concepts

•All costs are absorbed into Work in Process of a Job in real time (Job Issues and Job Labor)

•At Job Receipt, the Unit Cost establishes the item's Inventory Cost (the cost is averaged with existing on hand values)

▪Job Receipt moves the costs from Work in Process into your Inventory Value

▪The Inventory Value will reflect your absorbed costs of Material, Labor, Manufacturing Overhead, Subcon Services, and Misc Costs.

▪The Inventory Cost is used as the Cost of Goods Sold when the product is sold and invoiced.

•Job Close auto-reconciles your Work in Process account, balancing your total input costs (material issues and labor) versus your total output receipt costs, with the difference booked to WIP Adjustments

 

Estimated Job Costs

The cost rollup plays an important role in job costing

The cost rollup plays an important role in job costing because it provides the component cost inputs – purchased items and subassemblies -- that are used to calculate an estimated job cost when jobs are initially created.  The estimated job cost is used for comparison with job transaction costs and is also the cost basis for all partial job receipts.  

How the estimated job cost is calculated

When a job is initially created, the estimated job cost is comprised of these elements and is calculated as follows:  

Setup and Labor

Current work center hourly rates for labor and setup are applied to the job routing labor processes to calculate estimated labor and setup costs.    

Material

All job components are costed at each item’s current Estimated Cost.  It is therefore important that you update your estimated costs for purchase items (BOM >Estimated Purchase Costs) and perform cost rollups on a frequent basis so that estimated job costs reflect current component costs.    

Subcon  

Routing sequences for subcontract services include the supplier price along with a conversion multiplier that translates the supplier price into a unit cost used to calculate estimated subcontract service.

Mfg OH

Current work center hourly rates are applied to the job routing labor and subcontract processes to calculate these cost elements.

The estimated job cost is recalculated when job details are modified

The estimated job cost is automatically recalculated when you modify the job routing or line item details.  The recalculation is only applied to the particular process or detail line that gets changed.  

Use the Job Inquiry to view job cost details

You can view estimated and actual transaction job costs and underlying details in the Job Costs tab within the Job Inquiry screen.  

Job Costing

DBA balances your input costs (Work in Process) with your output receipt costs

Job transaction input costs flow into Work in Process.  Job receipt of output costs moves the value from Work in Process to Inventory.  At Job close, Work in Process is auto-reconciled and any difference between total input costs versus total output receipt costs is booked to the WIP Adjustments account and net Work in Process is always zeroed.  

Job Input Transaction Costs

All input transaction costs flow into Work in Process for the Job.

Final Job Receipt Preference (Job Cost Defaults)

The Final Job Receipt preference is a system setting that is maintained in the Jobs Setup – Job Cost Defaults screen.  It determines the suggested unit cost when a Final Receipt is performed in the Job Receipts screen.  Two options are available:  

Estimated Job Cost

With this method all Job Receipts suggested unit costs are at the Estimated Job Cost.  When the Job is Closed, the system will compare all of the input costs (material job issues and labor transaction costs) versus the value of the total Job Receipt output costs and it will post any difference to your WIP Adjustments account. The Estimated Job Cost preference, combined with Standard hour sequence routing completions, will approximate the functions of a standard costing system.

WIP Balancing Unit Cost

With this Final Job Receipt method, partial receipts are made at the Estimated Job Cost and, if your input costs are completely reported, the final receipt is given a suggested unit cost that exactly balances all input costs with the total receipt output costs, leaving a zero net WIP balance.

Final Receipt Balancing Cost Overview

•All partial receipts are performed at Estimated Job Cost.   Partial receipts can lead to a very large and unexpected final receipt balancing cost for the final receipt.  You may want to limit progressive receipts if you choose the WIP Balancing Unit Cost option for final receipt.

•You must be committed to having all material and labor accurately reported before you perform your final receipt.  A balancing cost will only be suggested if you a have green light for your sequence status indicators (Seq, Hours, issues, Subcon) in the Job Receipt screen.  If you do not have all status indicators in green light condition, the suggested unit cost will be Estimated Job Cost.  

•Use common sense judgment and realize that a suggested unit cost is only a suggestion.  Do not blindly receipt an output value that is not in line with your expectation or inventory value.

Job receipt processing

The job receipts function, which is performed in the Job Receipts screen, is the most important process in the WIP accounting workflow because it determines the finished item’s inventory value and ultimately its cost of goods sold.  

Make sure all status indicators are Green prior to Final Receipt

When finished items are received to inventory in the Job Receipts screen, make sure that you have completed all job transactions and are in green light status for status indicators for Sequence, Hours, Issues, and Subcon.   You should always perform your material issues in real time and report labor as you complete routing sequences.   Do not attempt to report labor hours after final receipt.

Make sure the unit cost is realistic    

When you receive a finished item, the program calculates a Suggested Cost and inserts it into the Unit Cost field, which is the cost that will be applied to the receipt transaction.  When you make a partial receipt, the Suggested Cost will always be equal to the Est Job Cost directly above it.  

When you make a final receipt, the Suggested Cost depends on your Job Cost Basis system setting.  

•If your system is set to the Estimated Job Cost basis, the Suggested Cost will be equal to the Est Job Cost.  Any amount in the WIP Balance field will be posted to your WIP Adjustments account.  

•If your system is set to the WIP Balancing Unit Cost setting, the Suggested Cost is a calculated unit cost that balances all receipt costs with transaction input job costs (material issues and labor transactions).  In this case the WIP Balance will be zero.  

When you use the WIP Balancing Unit Cost , always make sure the Suggested Cost is realistic, meaning that it is within acceptable range to the Est Job Cost above it and is not affected by an obvious costing error.  

If the Suggested Cost is not realistic, it could be due to an obvious costing error to one of the job inputs, which should be immediately corrected, or the job could have experienced a cost distortion caused by a one-off event such as a machine breakdown or some other unusual factor.  In either case, override the suggested Unit Cost with a realistic cost.  Any WIP Balance amount will be posted to WIP Adjustments and will be correctly accounted for.  

Typical sources of costing errors  

When the Suggested Cost is not realistic, here are typical sources of costing errors:  

•The status indicators at the top of the screen – Seq Status, Hours Status, Subcon Status, Issues Status – should all be displayed in green. If not, it means that some job processes may not be completed and therefore the cost profile is incomplete.  In that case, see that those transactions are made.  

•When the indicators are all displayed in green and the Suggested Cost differs greatly from the Est Job Cost, there is likely one input cost that has a gross error.  Most typically this involves a bad labor hours entry, where it is easy to add an extra zero or make a mis-calculation that can grossly distort job labor cost.  Review the Job Costs tab within the Job Inquiry screen and look for obvious errors and make appropriate corrections.  

•Inaccurate estimated costs versus the inventory costs for your purchased items will also cause potential errors.

“Reasonably close” is the cost objective

When it comes to manufactured item costing, “reasonably close” is the objective because true actual costing is not possible.  This is because the majority of costs are absorbed costs that are estimates of anticipated actual costs.  

Manufacturing overhead, for example, which is often the largest cost contributor, can only be an estimated cost.  This is because overhead is a collection of costs that are not fully known at the time job transactions are made.  Therefore, an estimated cost is used in the form of an hourly rate that anticipates the actual cost of manufacturing overhead.  

Direct labor is similar in that it represents a collection of different wage rates among workers, as well as non-job downtime, taxes, benefits, and other costs.  Attempting to apply all these costs to specific jobs is inefficient and impractical.  As with overhead, an estimated cost us used, in the form of an hourly rate, that anticipates the actual cost of labor.  

Because manufacturing overhead and direct labor are estimated costs, striving for some type of cost perfection is counter-productive.  For efficient costing, simply use shop rates that are reasonably close and make sure that job receipts are given a reasonable unit cost.  The variances that inevitably occur between actual and absorbed costs are handled automatically by the accounting system.  

Job close zeroes out net WIP

Finished jobs are formally closed within the Job Control Panel screen.  If there is any variance between total actual job transactions cost and the total job receipt cost to inventory, the program automatically adjusts your Work in Process account by the variance amount, with an offset to WIP Adjustments, so that net WIP for the closed job is always zero.  This job close balancing adjustment is what makes the Work in Process account self-adjusting and always in balance with the underlying jobs.