WIP Variance Account

[markdel16]

Currently running 7.6.100a. Using average cost environment.

From everything I've been reading, is no variance accounts should be hit unless using Standard Costing.

Looking for a little help of what determines the amount that hits the WIP Variance account upon closing of a Shop Floor order.

We close the orders individually, not as a range.

Some of the orders don't hit the WIP Variance at all, some do. There is no consistency to it. It could hit the account for a particular part number, and then on the the next Shop Floor order for the same part number, nothing goes to the WIP Variance.

Right now, what's being done is a manual journal entry at month end to move the WIP Variance into Inventory Assets.

Sometimes the entries are as small as $.01, others can be $2,000 or more.

 

[MacolaHelp]

You can create WIP variances in shop floor or POP. The cost of the component parts of the bill is captured when the bill is created. If you are using "pulled" items, it can happen when the customer order is generated, or any process where a manufacturing order is created, until the order is released. If a bill is captured months or weeks before it is produced, or if the bill was inaccurate to begin with, or if costs change markedly before it is produced, the bill is not dynamically updated throughout its life cycle.

Do you issue your material when the order is released or do you allocate components with or without GL distributions? These switches can affect what goes to the WIP variance account as well.

If the cost of the rolled up components varies between the time the bill is captured and the order is produced, the difference goes to WIP variance. I'm not sure what journal entry you are making to offset it, but I would instead use a cost adjustment in inventory to change the parent cost and absorb the WIP variance if you want your finished good costs to be accurate. You can also edit the captured bill until it is released. Once released, you can still edit by unreleasing and editing and re-releasing unless production has been reported against it. You also have some editing in shop floor you can do after the order is released, but I don't have access to double check on the computer I am on right now.

As for the inconsistency, are these orders created in the same time period? Are they being released the same way as far as allocations, issues and GL distributions? Also, do you close shop orders immediately after the production is completed and the product is on the shelf, or do you do them in a batch, maybe at month end?

 

[dgillz]

If you adjust material issue in POP after the item has been received, or manually issue items to the SFC order after it has been received, then subsequently close the POP or SFC order, then a variance is created regardless of how you value inventory.

If this were not the case, the value of the material issues would stay in WIP forever.

Software Sales, Training, Implementation and Support for Macola, eSynergy, and Crystal Reports

http://www.gainfocus.biz

"If you have a big enough dictionary, just about everything is a word"
--Dave Barry

 

[tpllc]

Mark,
My experience in an average cost creating WIP variance is as follows.

The process happens differently in POP than SFC as the processes are different.

When you report production in a POP environment the average cost is calculated by taking the captured BOM and the captured value added costs and uses that as the received cost and there should not be any variance unless you have used the adjust material issues or adjust value added cost functions. Even this will not cause a variance as long as there is enough inventory to support the changes. If you report a quantity of 10 units for $100 each and had no inventory on hand. Your average cost would be $100 each. Then if you sold 5 of them so that you have 5 left in inventory at $100 average cost and then you made a change to the adjust material or value added functions that is $5 a unit so there is now $50 that need to be added to inventory but there are only 5 left in inventory to absorb the difference. So only $25 is capitalized and the rest is expensed. So your new average cost is $105 and the variance is $25. There is another situation that needs to be considered. If you report production more than once and when you finish the POP order and mark the order complete and also select the issue components fully option. Now you have a situation where there is more costs that need to be capitalized, if there is enough inventory left then there will be no variance but if not it basically works like described above.

In SFC the issue is about the same but material issue as well as labor and overhead has a variety of ways to be added, as opposed to POP which is limited. Costs can still be added after you report production so when you report production the average cost is not changed until the posting of the MC job is done. You also don’t have to report all the labor or material. When this happens the same rule about available inventory to support the variance is in effect.




Smaller difference can also be caused by rounding. The BOM has 6 decimal places and the average cost has the same if you use a quantity that has a partial unit i.e. 2.5 the results may be more than 6 decimal places so a variance is created.

I hope this helps


Steve Henley
Trianglepartners.com
Exact Software consulting, sales and implementations.

If the only tool you can use is a hammer then all your problems look like nails.

 

[markdel16]

Thanks for all the explanations which have helped me get to the point of at least determining why the variance account is being hit and figuring out the calculations that equal the WIP Variance amount.

Here's what I've come up with: (I'll use real values from my calculation)

A Shop Floor order is entered for 30 items. At the time of creation of this shop floor order, the parent item's Average Cost is 45.344286. When the shop floor order is closed (I'm assuming this is automatically generated by the Close), there is an Inventory Transaction record for 7 items with a new average cost of 44.121333. The WIP Variance amount on this Shop Order was -$28.13, which is 23 x (45.344286-44.12133).

According to the responses above, this is designed behavior, correct? We've been told it's a bug in Progression, which I refused to believe.

Now, for the month end, the WIP Variance totals are being reclassified to the Inventory Asset account. Is this correct, or are we really messing up the financials?

Once again, thanks for the prompt and in depth replies.

 

[tpllc]

Mark,
It does appear that the code is doing what iyt's designed to do and the variances are real. It very difficu,t to give advice with out knowing a lot more about your operationas and overall financial reporting. But that being said my initial response is that it is incorrect to book this variance to an inventory asset account. The cost of goods sold will be at the average cost and there will be no way to relieve this inventory and also no way to count it to validate your asset register, stock status against your balance sheet.
The variance is an expense. If you wanted to capitalize this you should spread this over the inventory item that created the variance. In other words do a cost adjustment to the remaining inventory to absorb the variance. I do not believe this is a good practice as the remaining inventory will will be charged with all the variance.
I do not recommend using anything other than standard cost in a manufacturing environment. That is a personal opinion formulated over 30 years of experiance. There are way too many issues to discuss in this forum.

Steve Henley
Trianglepartners.com
Exact Software consulting, sales and implementations.

If the only tool you can use is a hammer then all your problems look like nails.

 

[dgillz]

I agree with Steve on the std cost issue.

Having said that, capitalizing variances is GAAP accounting and has to be done, and no version of Macola - or any other software that I am aware of - accomodates this.

My clients that do this do it offline in an excel spreadsheet, as a function of inventory turnover, and it is in a separate gl account. This will overcome the legitimate concerns Steve raises about the variances being improperly imposed on the remaining stock on hand.

In essence if 75% of this inventory has already been sold, then you need only capitalize 25% of the variance.

So expense your variances, in the COGS section of your income statement, then capitalize as need be to conform with GAAP.

Software Sales, Training, Implementation and Support for Macola, eSynergy, and Crystal Reports

http://www.gainfocus.biz

"If you have a big enough dictionary, just about everything is a word"
--Dave Barry

 

[MacolaHelp]

What you do with the GL entry or cost adjustments is based on how you identify COGS in OE setup and whether the WIP variance is due to increased or decreased component costs. The FG will be valued at the new rolled up average cost, but not all GL entries to support this cost may have been made.

For example: your cost was 45.00 when the order was entered and you use actual cost to record COGS. The finished good completes at 44.00. Here are the GL entries that occurred:
Release shop order
component inventory <45.00>
WIP 45.00
Complete shop order
WIP <45.00>
FG inventory 44.00
WIP variance 1.00
Sale of FG at actual cost
FG inventory <44.00>
COGS 44.00

In this example, the WIP variance relates to the component inventory that was over-credited, probably due to a change in some components average costs between order capture and recorded production. There is probably a discrepancy now in your component inventory stock status value and your GL detail for this account. You could reclass the variance into the component inventory account. You could also assume that the FG was produced with the higher cost components, and that the COGS should reflect that, even though the sum of the components is now less than before your order was produced. If so, you would debit COGS and credit WIP variance. Then, you must also adjust your order history to reflect the $45.00 COGS using processes\sales history\sales history load. Then your GL account will match your sales history reports.

The GL entries will be different if you use line item cost and/or if the variance is positive or negative. For small dollar amounts, it probably doesn't make a big difference what you do. But if thousands of dollars are involved and it is a noticeable change on your financials, I would probably go through the exercise of putting things in the right accounts on the balance sheet and doing cost adjustments or GL entries as needed. A certain amount of variance is to be expected in manufacturing environments with long lead times or components that vary widely in cost or where labor can be very different from job to job.

It does sound like the program is behaving as it should, and this is a real variance. I would be concerned if these variances are due to inaccurate BOMs. If so, rather than continually correct on the back end, you should be rattling someone's cage to clean up the BOM and update the costed bills regularly.

 

[TLeaders]

It has been awhile since I worked on Shop Floor, but this is how I remember the Shop Floor Wip calculations.
Average cost.
When material and labor are used/issues against a shop order the amount of the transaction updates a bucket call wip. When finished goods are received the average cost times the quantity received updates a field called wip used.

When the shop order is closed, the average cost is recalculated depending on the current quantity on hand. First the amount in wip is divided by the number of finished goods items received to calculate the average cost of the shop floor item. Then:

1. If the quantity on hand is less than the quantity received from the shop order. The program assumes that all the finished goods inventory was made on this shop order. An adjustment is made to the finished goods inventory to change the inventory average cost to the shop floor average cost. The balance in wip after the amount used for this adjustment is posted to wip variance. This amount reflects costs associated to inventory that has been sold (or used) and should be posted to COGS or another expense account.
2. If the inventory quantity on hand is greater than the quantity received on this shop order the balance in wip is used to adjust the inventory average cost. There should be no wip variance created.


In POP the wip variance is created because the program totals all the debits and credits and then makes an adjusting entry to the variance account. If your inventory has items that have fractional cent costs you could get a $.01 wip variance entry.

Please test, the logic may have changed.
Good Luck

Tom

 

[markdel16]

Thank you all for the responses.

The information provided was very useful. I know have a clear understanding of how the WIP Variance works, and can reproduce it.