Defining and Reconciling Work in Process – Part 2

This is Part 2 in a two-part article. View Part 1

  1. End-of-Month Reconciliation

The service manager/director must locate and list all repair orders with time paid to technicians but not yet processed.  These documents may be in several locations, including the following:

  1. At the cashier’s office waiting for the customer to pick up the vehicle and pay the bill.
  2. With the dispatcher.
  3. At the shop parts counter.
  4. With the warranty clerk/administrator.
  5. In a technician’s tool box or back pocket.

The accounting office must supply the service manager/director with a missing document report at the end of each month’s business.  It is impossible to perform an accurate Work-in-Process reconciliation unless all documents have been located.

In order to maintain strict control over repair orders in process, never allow a repair order to remain open in the month that it could be closed.  Some of the more common areas where repair orders remain open are as follows:

  1. When a part is ordered for a customer pay repair order, the repair order is held open until the customer returns and pays the entire bill.  No customer vehicle should be permitted to leave the premises without payment for work performed.  Open a new repair order when the customer returns.
  2. When a part is ordered on a warranty repair and the vehicle is drivable, this claim is not submitted for the operations completed and held open until all operations have been completed.  The claim for completed operations should be submitted immediately and a new claim opened when the customer returns.  Refer to the original repair order mileage in the case of vehicles that will exceed warranty mileage in the interim.
  3. Warranty claims are held until the credit is received before being entered into the accounting system.  All claims should be entered into the accounting system simultaneously with submission to the manufacturer.  This will set up a receivable and allow management to track payment completion or length of payment time.
  4. New and used car managers write repair orders for work to be performed (PDI, accessory installation, reconditioning, etc.) and do not close out the repair order until the vehicle is sold.  All repair orders should be closed as soon as the work is completed, the amount is charged to the vehicle, and the increase in vehicle inventory is charged to the stock record.

When all outstanding repair orders have been listed, compare the total labor cost to the Work-in-Process account and make the necessary adjustment.

III. Causes for Negative Adjustments

The following are causes for negative adjustments:

  1. Technicians who are paid guarantees but do not produce enough labor to equal the guarantee.
  2. Missing or unaccounted documents.
  3. Human error (posting, accounting errors, etc.).
  4. Fraud—the technician is paid for more hours than the customer is billed or paid for no work performed.
  5. Average technician cost of sale repair order costing rather than actual.
  6. Creative bookkeeping—deliberate over- or under-costing to assure balances close to zero.
  7. Monitoring the Account

The following account monitoring procedures should be utilized:

  1. Increase the production of technicians who do not produce enough to meet their guarantees.
  2. Eliminate all sources of fraud.
  3. Implement a procedure to eliminate missing repair orders.
  4. Implement policies to assure immediate close-out of repair orders.
  5. Implement a policy of actual costing.
  6. Ensure that separate accounts are kept for mechanical and body.

When analyzing the account, use the “Theory of Reasonableness.”  For example:

$2,178
(work-in-process
inventory—mechanical)
÷ $14.85
(overall effective
cost—estimated)
= 146.7
(# of flat rate
hours in process)

 

146.7
(# of flat rate
hours in process)
÷ 2.0
(hours per repair
order—overall estimate)
= 73.4
(# of repair
orders in process)

Now ask yourself the question, “Is it at all reasonable to have 73 repair orders in process at the end of the month?”

Keep in mind that labor is not the only item affected by Work-in-Process.

$2,178
(work-in-process
inventory—mechanical)
÷ 33.5%
(cost of sales percentage)
= $6,502
(retail labor sales)

 

$6,502
(retail labor sales)
÷ 78.6%
(P/L ratio)
= $5,111
(retail parts sales)

 

$6,502
(retail labor sales)
÷ 35.4%
(sublet to labor sales)
= $2,302
(retail sublet sales)

With a Work-in-Process amount of $2,178, $13,915 in sales are not processed with applicable gross profits.

Written by David Dietrich

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