This discussion is provided to explain how ManEx tracks and values the dollars in WIP (Work in process).
First, it should be understood that there is NO physical inventory location in WIP, like there is In-Stores and Finished Goods inventory. WIP Value is computed, and is a dollar value, NOT a count of inventory items.
WIP inventory value is created whenever an inventory item is kitted to a work order. The value of WIP is incremented by the standard cost of the items kitted. And the value of Inventory is decremented by the standard cost of the items kitted. At this point, there is NO physical existence of the inventory, only the value of the inventory in WIP. If the sum of the standard value of components kitted to a work order is $100, then WIP value is $100 greater than it was, and inventory is $100 less than it was before the transaction. There isn’t a place where the user can actually “see” the quantity of parts (inventory) that is in WIP. The Inventory valuation report will display a value for WIP, but it doesn’t exactly match the General Ledger WIP value. What this report is displaying is the computed WIP. It does this by determining how many assemblies are still in the work order, extending through the BOM, the number of parts that would have been issued to match the balance of assemblies in the work order. Then the shortages are subtracted, and that is the basis for the quantities shown on the evaluation report. The dollar amounts are simply the extension of the quantities multiplied by the standard cost. Any Line Shortage issues to the work order will NOT be picked up in this report. Over-issues won’t either, unless they are absorbed by the kit when the kit is closed.
When an assembly is completed in a work order, and a transaction is performed to move the assembly into finished goods, the value of WIP is decremented by the standard cost of the assembly (not the components), and the inventory value is incremented by the same amount. So, as long as the standard cost of the assembly is the same as the sum of the standard value of the components (i.e. $100), then Inventory and WIP values will revert back to the same as they were before the work order. Only instead of $100 worth of parts, it is $100 worth of assemblies.
But what if it is not the same? That is, the value of the sum of the components don't equal the value of the assembly. This can happen by several ways: The BOM may have been changed, adding or deleting parts, without changing the standard cost of the assembly; The standard cost of one or more items on the BOM could be changed based on procurement history, without changing the top assembly; The standard cost of the assembly was changed for any reason.
Let's take a couple of examples:
| Assembly 4321 Standard Cost is $39.00 |
Assembly 5678 Standard Cost is $30.00 |
| Part #1 |
$1.00 |
1 |
$1.00 |
Part #1 |
$1.00 |
1 |
$1.00 |
| Part #2 |
$2.00 |
2 |
$2.00 |
Part #2 |
$2.00 |
2 |
$2.00 |
| Part #3 |
$1.00 |
5 |
$5.00 |
Part #3 |
$1.00 |
5 |
$5.00 |
| Part #4 |
$3.00 |
1 |
$3.00 |
Part #4 |
$3.00 |
1 |
$3.00 |
| Part #5 |
$6.00 |
1 |
$6.00 |
Part #5 |
$4.00 |
1 |
$4.00 |
| Part #6 |
$3.00 |
6 |
$18.00 |
Part #6 |
$2.00 |
4 |
$8.00 |
| Part #7 |
$1.00 |
1 |
$1.00 |
Part #7 |
$1.00 |
1 |
$1.00 |
| Part #8 |
$1.00 |
2 |
$2.00 |
Part #8 |
$1.00 |
2 |
$2.00 |
| Part #9 |
$1.00 |
1 |
$1.00 |
Part #9 |
$1.00 |
1 |
$1.00 |
| |
Total
|
|
$39.00
|
|
Total
|
|
$27.00
|
Assembly #4321 has the total of the standard cost of the items in the BOM equal to the standard cost. But Assembly #5678 does not. The Standard Cost of this assembly is $3.00 higher than the sum of the components. When a work order is kitted for this assembly, a total value of $27.00 is added to WIP value, and subtracted from inventory value. When the work order progresses to completion, and the assemblies are moved from WIP to Finished Goods inventory, the value of WIP is decreased by $30.00, and the value of inventory is increased by the same amount, $30.00. But it's not possible to put $27.00 into WIP and take out $30.00, leaving a balance of negative $3.00 in WIP. So how is this accounted for?
CONFIGURATION VARIANCE
Configuration variance captures the computed differences between the value of components that are supposed to be kitted and the assembly. For each assembly #5678 that goes to finished goods, a configuration variance of $3.00 is created. In this case, WIP is charged a negative $3.00 per unit to account for the difference, and the Configuration Variance account number (established in the accounting system setup) is offset with a positive $3.00. This variance is calculated every time an assembly is completed from a work order to finished goods.
It works the opposite way for an undervalued assembly. Assuming that the standard value of the assembly #5678 was set at $25.00, the following scenario would transpire: $27.00 would be placed into the WIP account as the order is kitted, but only $25.00 is removed as the assemblies are completed, leaving $2.00 value in WIP for each unit completed. But at the end of the day, there is actually no inventory in WIP, but it carries the value of $2.00 for each assembly completed. If the work order was for 100 units, then $200.00 would be on the books as WIP value, but the floor is empty. Again, the configuration variance captures the difference, empties the WIP account (as it should be) and charges the difference to the configuration variance account.
Now, let's go back to our first example:
| Assembly 4321 Standard Cost is $39.00 (BOM Quantities) |
Assembly 4321 Standard Cost is $39.00 (ACTUAL kitted Quantities) |
| Part #1 |
$1.00 |
1 |
$1.00 |
Part #1 |
$1.00 |
1 |
$1.00 |
| Part #2 |
$2.00 |
2 |
$2.00 |
Part #2 |
$2.00 |
2 |
$2.00 |
| Part #3 |
$1.00 |
5 |
$5.00 |
Part #3 |
$1.00 |
5 |
$5.00 |
| Part #4 |
$3.00 |
1 |
$3.00 |
Part #4 |
$3.00 |
1 |
$3.00 |
| Part #5 |
$6.00 |
1 |
$6.00 |
Part #5 |
$6.00 |
1 |
$6.00 |
| Part #6 |
$3.00 |
6 |
$18.00 |
Part #6 |
$2.00 |
6 |
$8.00 |
| Part #7 |
$1.00 |
1 |
$1.00 |
Part #7 |
$1.00 |
2 |
$2.00 |
| Part #8 |
$1.00 |
2 |
$2.00 |
Part #8 |
$1.00 |
3 |
$3.00 |
| Part #9 |
$1.00 |
1 |
$1.00 |
Part #9 |
$1.00 |
2 |
$2.00 |
| |
Total
|
|
$39.00
|
|
Total
|
|
$42.00
|
Only this time, the Configuration Variance is zero, but with more parts have been issued to the kit than the BOM called for. Additional parts could have been issued for several reasons: Original parts were faulty; Original parts were lost in the machine, etc. So additional parts were issued to the work order. From an accounting standpoint, the value of those additional parts were relieved from inventory, and charged to the WIP account when they were issued to the kit. So WIP is charged for the original quantity plus the additional issues, or shortages, or replacements. In this example, it is $42.00.
Now, when the assemblies are completed, the WIP value is decreased by the standard cost ($39.00), which matches the BOM total, so there is no configuration variance. But, the extra $3.00 is still in the WIP value. So how is this extra $3.00 cleared from WIP?
MANUFACTURING VARIANCE
Manufacturing variance captures the computed differences between the value of components that are supposed to be kitted and actual value of components kitted. For each assembly #1234 that goes to finished goods, a manufacturing variance of $3.00 is created. In this case, WIP is charged a negative $3.00 per unit to account for the difference, and the Manufacturing Variance account number (established in the accounting system setup) is offset with a positive $3.00. This variance is calculated every time a work order is completed, and when the Kit is closed.
An open work order is closed when all of the assemblies are shipped to finished goods or scrapped, and the balance due is zero. At that point, the Kit can also be closed. The kit closure is a financial operation, securing the kit so no further transactions will be performed against the kit and the actual value of parts issued to the kit can be determined. Users will be asked to resolve shortages and over-issues to the kit before closing it. Once closed, no parts can be issued to or received from the kit. It is at this time that the Manufacturing Variance is computed. Any quantities different from the BOM established for the kit that were actually issued to the kit are calculated at standard cost and charged to the Manufacturing Variance as described above.
If there is no actual inventory count for WIP inventory, only a dollar amount, then what is the WIP Evaluation report?
This report is a calculated value of inventory that was kitted. It may or may not equal the accounting value of WIP, as the accounting value can be adjusted by transactions outside inventory, such as journal entries. But the WIP report will be a very close approximation of the WIP value. It is determined by the following sequence:
First, only open work orders are considered. Closed or Cancelled work orders are not included. Then the balance of assemblies due for each work order is determined. For each work order included, the original quantity of each part kitted for the work order is determined based on the kit pull, and extended by the balance of the work order, and by the standard cost of those parts. Then kit shortages are checked. All shortages for the work order are then subtracted from the total value of the work order. This information is then displayed in the WIP Evaluation report.
This information continues to be reported until the balance of a work order is zero and the kit is closed. At that point, all WIP value associated with the work order is returned to zero.
What can cause a difference between the WIP Evaluation Report and the Balance Sheet?
Miscellaneous kit shortages issued to the kit (items without Item Master Inventory information nor standard cost), will not show on the WIP Evaluation report. Any Journal Entries to the General Ledger WIP account associated with movement, adjustments and corrections will not be included in this report. If a user happened to kit materials to a work order that did not have a standard cost associated with the parts, the Balance sheet will reflect no WIP value, but subsequent assignment of standards to the parts will affect the WIP Evaluation report, but not the General Ledger.
In summary, the WIP Evaluation report will provide users with a picture of parts issued to work orders that should be in WIP, and is a guide to the approximate value of WIP Inventory. But it is the General Ledger that keeps accurate track of the real WIP value.
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