This is Part 1 in a two-part article. Be sure to check back next week for Part 2.
There seems to be a great deal of confusion and consternation in the application of the Work-in-Process account. In reality, the account is quite simple and, coupled with unapplied time/adjustment to cost of labor sales, provides a wealth of information.
First, what is the Work-in-Process account? Simply stated, it is a wash account to allow you to track labor that you have purchased (cost of sale) compared to recovery of these purchases (repair order cost relief).
It might be easier to visualize if compared to parts inventory:
- Purchase of 10 spark plugs at $1.00 each. The business office is informed of the purchase via an invoice from the vendor (manufacturer, John’s Spark Plug Palace, etc.) suitably identified as to account destination (A/C 1250, parts inventory, etc.).
- Sale of five spark plugs at cost (retail, customer, manufacturer, internal departments, etc.).
- Inventory remaining after sale.
- In order to check the accuracy of the account, a physical inventory is performed and five spark plugs are verified in stock.
- Account reconciliation is zero (0).
The labor inventory reconciliation is accomplished in the same manner. The labor inventory is identified on the statement as work/labor in process and is the total amount of labor remaining in the inventory.
- Purchase of 40 hours of labor from Paul Technician at $10 per hour. The business office is informed of the purchase with the issuance of a payroll check. An extremely important point to remember at this point is that wrench-turning labor only can be applied to Work-in-Process. Other technician income (vacation, school, holiday, sick, etc.) must be applied to the appropriate expense account.
- Resale to customers of repair order costing at the same technician cost as in (6) above.
- Purchased labor inventory remaining after costing relief.
- Physical inventory open repair orders at month-end (repair orders with time paid to technicians but not yet processed through the business office).
- Reconciliation—the example is not reconciled and must be applied to adjustment to cost of sale/unapplied time account (11) to complete reconciliation to zero (12). This account application is a debit to gross profit.
There are two important points to remember:
- Nothing except wrench-turning compensation should be applied to Work-in-Process.
- The financial statement Work-in-Process account includes labor for both mechanical and body shop. The office manager or controller will provide you with individual department Work-in-Process. Separate accounts must be maintained by accounting.
Continued next week in Part 2
Written by David Dietrich