This document describes the basic setup of general ledger posting types and templates required to account for Inventory at standard cost and to account for Work In Process and related value-added activity in NDS applications.
To post cost activity to and from inventory and WIP such that WIP balance can be tied out to content of open work orders, and differences between actual costs applied and costs received into inventory (at standard) get posted to variance account(s).
All transactions which add or remove units from Inventory need to adjust inventory value at standard unit cost. Work in Process must reflect actual units of material applied. Additionally, it is often desirable to track actual costs for value-added WIP activities, while not introducing the actual costs back into inventory.
For our example, we need to implement postings for the following transactions :
Purchase receipt into inventory
Issue of component inventory to work order
Labor reporting to work order
Purchased services applied to work order
Scrap of units on work order
Receipt of work order into inventory
Customer order shipment from inventory
The key mechanic requirement in accounting for this is that component material costs need to be applied to and relieved from WIP consistent with units actually issued and completed units received, while the receipt of units received needs to be performed at standard cost. This requires that the receipt transactions be ‘buffered' from the WIP. We do this by introducing one or more variance accrual accounts to factor the difference between the costs inventoried and the cost relieved from WIP.
We will use the following detail posting accounts in our example:
General Inventory Asset 1101 Receiving Accrual Liability
WIP Asset 1301 WIP Material Variance Liability
1302 WIP Labor Variance Liability
1303 WIP Service Variance Liability
1304 WIP Fixed OH Variance Liability
1305 WIP Variable OH Var Liability
1102 Shipping Accrual Liability
All the variance and accrual accounts are set up as liability accounts. These can be cleared and expensed periodically as necessary. The account numbers are of course fictitious and are provided mainly for clarity.
NDS provides a flexible interface between Manufacturing and the General Ledger which implements transactions using 2-sided journal entries tied to specific ‘Posting Types'. The purpose of the posting types is well-documented elsewhere and will not be repeated here. The postings are implemented using ‘templates', which define criteria which limit when the contained journal entry is to be made. The assignment of Debit and Credit account on these templates is subject to the natural sign of the transaction amount. In the example below, I've made the sign is always positive for clarity of illustration. However, in NDS material issues are expected to have a negative sign ( effect on inventory ) , therefore the accounts need to be transposed from the example when creating templates for negative sign transactions.
Note: The NDS posting type SCRAP performs a single transaction using estimated standard cost ( based on operation progress). This is not broken out into elemental costs, so there's no way to relate this posting to the element-specific variance accounts we're using in this example. Therefore, we will suppress the SCRAP posting type, all costs related to scrap transactions will end up in the variance accounts when the order is closed.
The general flow is that we will apply actual costs to WIP during work activity, relieve WIP at standard unit cost when units are received into stock, and apply difference between the actuals and the relief to variance accounts when the order is closed.
Assume a manufactured item with the following standard unit costs :
Material $1.00
Labor $1.30
Service $0.65
Fixed Overhead $0.25
Variable Overhead $0.52
Total $3.72
A sample transaction flow illustrating activity related to a single work order for this item is shown below:
Type Debit Credit
INVEN 1001 Gen'l Inv $15.00 1101 Recv Accrual $15.00
INVEN 1201 WIP $10.00 1001 Gen'l Inventory $10.00
LABOR 1201 WIP $12.00 1322 Acc Labor Exp $12.00
FIXOV 1201 WIP $2.50 1324 Acc Fix OH Exp $2.50
VAROV 1201 WIP $4.80 1325 Acc Var OH Exp $4.80
POWIP 1201 WIP $7.00 1323 Acc Service Exp $7.00
(no postings at this time)
INVEN 1001 Gen'l Inv $33.48 1201 WIP $33.48
At this point, WIP contains a residual of $2.82 ($36.30 applied – $33.48 relieved). When we close this work order, we will obtain the following postings :
WIMAT 1301 Matl Variance $1.00 1201 WIP $1.00
WILAB 1302 Labor Var $ .30 1201 WIP $ .30
WISER 1303 Service Var $1.15 1201 WIP $1.15
WIFOV 1304 Fixed OH Var $ .25 1201 WIP $ .25
WIVOV 1305 Var OH Var $ .12 1201 WIP $ .12
At this point, the balance in WIP associated with this order is $0.00.
If desired, all this could be steered to a single variance account using the WICST posting type. We used the elemental posting types here to aid in illustration.
INVEN 1102 Shipping Accrual $33.48 1001 Gen'l Inv $33.48
When the sales journal is run, the INV posting type in the sales interface will debit COGS and credit the shipping accrual account based on the cost on the sales order. Any difference between the sales order unit cost and the standard cost at the time of shipment will remain in the shipping accrual account.