The Importance of Accurately Tracking and Managing Work In Process (WIP) – Part 1

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:

Parts

Labor

(1)   $100.00 Inventory entry (6)      $800.00
(2)    ($50.00) Sale (7)     ($600.00)
(3)     $50.00 Inventory remaining (8)      $200.00
(4)    ($50.00) Physical inventory (9)     ($100.00)
(5)       $0.00 Reconciliation (10)      $100.00
Unapplied time (11)     ($100.00)
(12)          $0.00
  • (1) Purchase of 10 spark plugs at $10.00 each.  The business office is informed of the purchase via an invoice from the vendor (manufacturer, Jim’s Auto Repair, etc.) suitably identified as to account destination (A/C 1250, parts inventory, etc.).
  • (2) Sale of five spark plugs at cost (retail, customer, manufacturer, internal departments, etc.).
  • (3) Inventory remaining after sale.
  • (4) In order to check the accuracy of the account, a physical inventory is performed and five spark plugs are verified in stock.
  • (5) 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.

  • (6) Purchase of 40 hours of labor from Frank the Technician at $20 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.
  • (7) Resale to customers of repair order costing at the same technician cost as in (6) above.
  • (8) Purchased labor inventory remaining after costing relief.
  • (9) Physical inventory open repair orders at month-end (repair orders with time paid to technicians but not yet processed through the business office).
  • (10) 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:

  1. Nothing except wrench-turning compensation can be applied to Work-in-Process.
  2. 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.

End-of-Month Reconciliation

Utilizing a simple tracking WIP Recap document, 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 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.

Written by David Dietrich

Continued in Part 2. View Part 2 >>

About the Author