Work In Progress Overview (WIP)
Work in Progress (WIP) is a term used to identify the value of a project in progress for the accurate recognition of profit at a point in time, generally at the end of each period. Chartered Accounting bodies recognise the need for an effective internal financial budgeting and reporting system to provide accurate costs and reliable estimates in the recognition of contract profit. Workbench provides this foundation and also provides the tools to calculate Work in Progress information so that profit can be accurately recognised.
Philosophical approaches to WIP
There are two main philosophical approaches to WIP, costs, and revenue:
All costs and sales invoices are passed through the Income & Expense portion of the General Ledger (Profit and Loss Account)/(Statement of Financial Performance). WIP is shown via month end reports containing Revenue, Costs, and % of Profit Earned on all Jobs. A general ledger journal is created to adjust the Profit & Loss Account with corresponding entries that recognise WIP as an asset in the Balance Sheet (Statement of Financial Position). The WIP adjustment to the Profit & Loss Account could adjust Revenue or Cost of Sales.
All costs and sales invoices are passed through to the Balance Sheet WIP asset account. WIP is shown via month end reports containing Revenue, Costs, and % of Profit Earned on all Jobs. A general ledger journal is created to adjust the Balance Sheet WIP with corresponding entries to Costs and Revenue in the Profit & Loss Account. This method would best suit the WIP type “At Finalised” where no costs or revenue are recognised in the Profit & Loss Account until the project is completed.
From Workbench’s point of view, the issue is academic even though the first option is the assumed position. AP and AR Invoices are exported to the Financials of choice based on designated GL Accounts. These could equally be P&L or Balance Sheet codes.
WIP Options
The basis for the WIP calculation is determined by the WIP Code on each job. This means that a number of WIP options can be used on the various types of jobs in your organisation.
Job WIP can be divided into six categories. These are reflected in WIP Codes:
Earned Revenue : The unbilled value of work to date, based on costs incurred, marked up by the budgeted margin percentage for the contract, less invoicing to date.
Forecast Revenue : This method recognises the forecast final profit on a percent complete basis. This type relies on the Contract Forecast being done before WIP is generated, therefore a Job Contract must exist for the job as well.
Input Revenue : The unbilled value of work to date, priced at cost or retail (charge out). Used with Input Based jobs.
Output Revenue : The unbilled value of outputs to date, priced at schedule of rates. Used with Output Based jobs.
Input & Output Revenue: The unbilled value of inputs and outputs to date, priced at cost or retail (charge out) and the price of the Output Schedule rates. Used with Input and Output Based jobs.
At Finalised: No profit is recognised in the Profit & Loss Account until the Job is finalised (the finalised flag is checked in Job Details). When finalised, WIP is not generated for the Job, therefore leaving a Surplus/Deficit. Finalised Date needs to be <= Period End Date.
Generate WIP
Generally, WIP is generated at the end of each period after AP and AR processing. Use Generate WIP Accruals to produce accruals based on each job’s assigned WIP Code type. Adjustments can be made after the calculation.
WIP Adjustments
Once generated, WIP accruals can optionally be adjusted within Workbench. Using WIP Adjustments you can review any adjustments made during the Generate WIP Accruals process.
If the code has Justifications enabled, project managers can add appropriate justifications in Contract Work In Progress and Contract Potential Gains/Loss
Monthly Processing
The creation and review of the Work in Progress is a formal process that takes place at the end of each accounting period. This formal process could be summarised as follows:
Complete timesheets, accounts payable, and accounts receivable processing
Generate PO Accrual - for the WIP process to take account of PO accruals, the purchase order accrual process will need to be generated first
Generate Forecasts for jobs that use the Forecast Revenue WIP type
Review WIP Adjustments and Contract Work In Progress
Export accruals to update WIP journal to General Ledger