The Importance Of Accurately Tracking And Managing Work In Process (WIP) – Part 2

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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 for 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.

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:

$3520.80
(work-in-process
inventory-mechanical)
÷ $24.00
(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.

$3520.80
(work-in-process
inventory-mechanical)
÷ 33.5%
(cost of sales percentage)
= $10,509.85
(retail labor sales)
$10,509.85
(retail labor sales)
x 98.6%
(P/L ratio)
= $10,362.71
(retail parts sales)

With a Work-in-Process amount of $10,509.85 in labor and $10,362.71 in parts, $20,872.56 in sales are not processed with applicable gross profits. This does not include any sublet sales and gross, as well.

Financial Statement WIP and Unapplied Locations

Manufacturer
Account
Page
Honda Work-in-process
Unapplied labor
1
4
Ford Work-in-process
Unapplied time
1
5
Subaru Work-in-process
Adjustment/cost of labor
1
4
Toyota Work-in-process
Unapplied time
1
5
Nissan Work-in-process
Adjustment/cost of labor
1
4
GM Work-in-process
Adjustment/cost of labor
1
3

Remember that Work-in-Process account totals include both mechanical and body.

Written by David Dietrich

Examples of WIP Recap document are available by calling David Dietrich, at M5 Management Services at 205-329-3735, or e mail at davedietrich@m5ms.com

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