Understanding Work Order Costing

Using specific examples from the demo data, this article explores all the various facets of work order costing.

In this article, we will use specific examples from the stock xTuple demo data to explore the topic of work order costing. For the purposes of this exercise, we will be working with the test item YTRUCK1 which has a standard cost of $3.9252. To view the YTRUCK1 item, go to the Products > Item > List menu and choose the YTRUCK1 item from the list. 

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Item master screen for YTRUCK1

The cost category assigned to this item in site WH1 is the FINISHED category. To view the elements of this cost category, go to Inventory > Setup >  Cost Categories and select the FINISHED category:

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Cost category definition for the Finished Product category

Before we begin the work order costing process, it is important to note that value will flow as follows:

  • When we issue material into the work order (WO), the inventory asset account for the raw materials will be credited and the WIP Asset account for YTRUCK1 will be debited.
  • When we post labor to the WO, the labor and overhead costs account will be credited and the WIP Asset account will be debited.

Note: In this example the labor and overhead costs account is a liability account. As such, this account will need to be cleared, normally as a part of payroll journal entries. It may also be set as an expense account, normally titled “Earned Manufacturing Expense.” In this case it carries a credit balance but is offset by expenses booked as a part of payroll. The WIP Asset account should only be mapped in Cost Categories in the WIP Asset position. A common mistake is to use this same account in the Inventory Asset position for items that are subassemblies. This defeats the purpose of the WIP Asset account which is to hold the value of labor and material that has been issued to WOs that are in process. It is cleared, as we will see, when the WO is closed.

We will create the following WO for a quantity of 100 YTRUCK1s. Open the Work Order screen by going to Manufacturing > Work Order > New > Work Order. In the Work Order window, open the YTRUCK1 item in the Item Number field and choose the Costing tab. 

Note the values on the Costing tab on the WO. As labor and material is issued to the WO and as we receive value against the WO, these figures will change.

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Work order with no associated costs

The screenshot below shows what the work order looks like after all of the materials have been issued:

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Work order costing once materials have been issued to the order

As a result, here are the journal entries that were created from issuing the materials:

Date Source Doc. # Reference Account Debit Credit
2017-11-07 W/O W/O 10188-001 Material TSUB1 Issue to Work Order 01-01-1250-01 - WIP Asset 135.13  
2017-11-07 W/O W/O 10188-001 Material TSUB1 Issue to Work Order 01-01-1215-01 - Warehouse 1: Materials   135.13
2017-11-07 W/O W/O 10188-001 Material TBODY1 Issue to Work Order 01-01-1250-01 - WIP Asset 150.00  
2017-11-07 W/O W/O 10188-001 Material TBODY1 Issue to Work Order 01-01-1215-01 - Warehouse 1: Materials   150.00
2017-11-07 W/O W/O 10188-001 Material TWHEEL1 Issue to Work Order 01-01-1250-01 - WIP Asset 60.00  
2017-11-07 W/O W/O 10188-001 Material TWHEEL1 Issue to Work Order 01-01-1215-01 - Warehouse 1: Materials   60.00
2017-11-07 W/O W/O 10188-001 Material YPAINT1 Issue to Work Order 01-01-1250-01 - WIP Asset 3.12  
2017-11-07 W/O W/O 10188-001 Material YPAINT1 Issue to Work Order 01-01-1215-01 - Warehouse 1: Materials   3.12
Totals         348.25 348.25

Again, the asset account is the one mapped to each of the components being issued to the WO and the WIP Asset account is the one mapped to the YTRUCK1’s Cost Category.

Next, we will post labor and, as a result, the Costing tab will change:

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Labor costs added to the work order costing

Additionally, here are the journal entries:

Date Source Doc. # Reference Account Debit Credit
2017-11-07 W/O 10188-001 Post Setup Time SHIPPING/ to Work Order 01-01-1250-01 - WIP Asset 0.96  
2017-11-07 W/O 10188-001 Post Setup Time SHIPPING/ to Work Order 01-01-2320-01 - Accrued Labor and Overhead Costs   0.96
2017-11-07 W/O 10188-001 Post Run Time SHIPPING/ to Work Order 01-01-1250-01 - WIP Asset 4.81  
2017-11-07 W/O 10188-001 Post Run Time SHIPPING/ to Work Order 01-01-2320-01 - Accrued Labor and Overhead Costs   4.81
2017-11-07 W/O 10188-001 Post Setup Time Standard Operation - Assembly/ to Work Order 01-01-1250-01 - WIP Asset 2.75  
2017-11-07 W/O 10188-001 Post Setup Time Standard Operation - Assembly/ to Work Order 01-01-2320-01 - Accrued Labor and Overhead Costs   2.75
2017-11-07 W/O 10188-001 Post Run Time Standard Operation - Assembly/ to Work Order 01-01-1250-01 - WIP Asset 6.87  
2017-11-07 W/O 10188-001 Post Run Time Standard Operation - Assembly/ to Work Order 01-01-2320-01 - Accrued Labor and Overhead Costs   6.87
2017-11-07 W/O 10188-001 Post Setup Time Standard Paint Operation/ to Work Order 01-01-1250-01 - WIP Asset 1.37  
2017-11-07 W/O 10188-001 Post Setup Time Standard Paint Operation/ to Work Order 01-01-2320-01 - Accrued Labor and Overhead Costs   1.37
2017-11-07 W/O 10188-001 Post Run Time Standard Paint Operation/ to Work Order 01-01-1250-01 - WIP Asset 27.50  
2017-11-07 W/O 10188-001 Post Run Time Standard Paint Operation/ to Work Order 01-01-2320-01 - Accrued Labor and Overhead Costs   27.50

The value of labor is flowing into the WO as a debit to the YTRUCK1’s WIP Asset account.

Now we receive 100 YTRUCK1s off the WO, and the Costing tab will appear as follows:

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Received cost of work order is updated when production is posted

The situation of posted costs = received costs is extremely rare. If we close the WO now, there will be no variance posted. To show a variance we will issue more material into this WO. Let's say that, perhaps due to humidity, we had to consume more paint than usual, and the results left us with this:

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Costing variance displayed on the work order's Costing tab

Again, here are the journal entries:

Date Source Doc. # Reference Account Debit Credit
2017-11-07 W/O 10188-001 Material YPAINT1 Issue to Work Order 01-01-1250-01 - WIP Asset 0.78  
2017-11-07 W/O 10188-001 Material YPAINT1 Issue to Work Order 01-01-1215-01 - Warehouse 1: Materials   0.78

The additional $.78 cents of paint issued to the WO will result in a variance when we close the WO. We issued $393.30 of value into the WO (debited into its WIP account) but only received $392.52 from it. When the WO is closed, the WIP Asset account is cleared and the .78 is booked as a variance. Here is what this looks like in the ledger:

Date Source Doc. # Reference Account Debit Credit
2017-11-07 W/O 10188-001 Manufacturing Inventory Cost Variance for YTRUCK1 01-01-5450-01 - Cost of Inventory Variances 0.78  
2017-11-07 W/O 10188-001 Manufacturing Inventory Cost Variance for YTRUCK1 01-01-1250-01 - WIP Asset   0.78

The closed WO now appears as:

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View of work order after being closed

Additionally, you can use the Manufacture > Report > Work Order Costing window to see a recap in detail:

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Work order costing report

Please note that if more value was posted into WIP, as was the case in this example, then when the WO is closed there will be a debit to the Inventory Cost Variances account and a credit to WIP Asset. This is an example of what happens when manufacturing performs below standard.

When we take more value out of WIP than we put in, normally associated with performance that is better than standard, the debits and credits are reversed. The WIP Asset account is debited and the Inventory Cost Variance is credited.

The system will not leave any value in WIP when the WO is closed.