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Avoid GL impact and average cost inaccuracy when using WIP and routing

WIP and Routing provide those who manufacture products the ability to track and monitor inventory and costs from sourcing components through the final build of finished goods. There is an expectation when following the basic path, Work Order to Issue Components to Complete (Build), that the financial impact would accurately account for the Completion transaction. The expectation is met when the completed quantity is for the full quantity on the Work Order. If the Completion quantity is less than the Work Order quantity the result in the GL is not as most would expect. Originally the issue was reported and was filed as a defect, but was converted to an enhancement (Enhancement #325058) by NetSuite.

This article will demonstrate how to identify the WIP and Routing configuration that will allow this inaccuracy as well to determine how to modify your operations to avoid it entirely.

The simple breakdown of the issue:

  • Widget Company
  • Assembly Item: Widget
  • Assembly Cost: $10.00
  • Work Order (IC1234)
  • Build Qty: 200
  • Total WO Value: $2000
  • Work Order Issue (IC2345)
  • Work Order Completion – Build Qty = 100 (IC3456)

A work order is built to signify the intent to assemble and complete 200 Widgets, and the overall value of the Work Order when completed is $2,000. From the Work Order the components are issued, moving the total value of the components to WIP in the GL and the inventory quantity is removed from On Hand.

100 Assemblies are physically assembled, and to account for this a completion is entered from the Work Order with zero scrap.

The Value of 100 completed Widgets is $1,000.0

(100 X $10.00 = $1,000)

From the saved completion the GL impact shows balance between WIP and Finished Goods at an amount of $2000. Nothing was scrapped, nothing was lost or damaged, yet the impact is for the full Work Order value, not what was completed.

Inventory : Finished Goods  GL Impact = $2000

Inventory : WIP = $2000

Further review of the Finished Good (Widget) will show that the transaction updated the Average Cost of the item based on the entire work order as well, based on the GL impact.

Starting Average cost = $0.00

Average Cost after partial completion = $20  ($2000 / 100 = $20)

Expected Average Cost = $10.00

Past the identified issue with the GL and Average Cost the Work Order remains open with the components fully consumed, and a secondary completion of the remaining qty to build will have NO GL impact at all. It is allowed, the qty is built and components consumed but there is no financial impact of the transaction.

WIP Costing Settings/Configuration

WIP Average Cost Completion Unit Cost setting

This scenario above is only met in full when the WIP Average Cost Completion Unit Costing is set to “Open WIP Amount”, the GL impact of the initial partial build is correct when set to “Average Cost” but not without downstream effects when completing the final completion/s.

The setting is found at: Setup>Accounting Preferences>Items/Transactions>Cost Accounting

Below is a breakdown of the setting, the NetSuite definitions and an additional explanation of the settings not mentioned clearly in support documentation.

 

Open WIP Amount:

“Select this cost calculation method for calculating the completion cost based on the Open WIP amount”

This statement is generally misunderstood, and the assumption is that what is removed from Open WIP will be used in the cost calculation, but the statement is quite literal, it uses the Full Open WIP amount to calculate cost, as outlined above.

Average Cost:

 “Select this cost calculation method to see deviations between the actual cost of component consumption and the average cost of assemblies. If these variances are valid, they are incorporated into the assembly cost using the Inventory Adjustment Worksheet.”

In this scenario, the difference between the full value of the Work Order, and the value of the partial build is written to a variance account and not into finished the good. It is essentially writing off the components not being utilized in the partial build. This option does create balance in the GL and Average Cost but does not allow for further completion as the issued components were already consumed by the build and the variance.

In either case is there no support for accurate accounting of a partial completions, 100% of the issued componentry is consumed in either case. It is either written to the finished good skewing the GL and average cost, or to a variance account. In either case the remaining components, not used in the build, are physically in WIP and logically consumed.

The work-arounds

Utilize the Completion with Backflush

Using the Backflush option on a completion, simply put, combines the Issue and the Completion into a single step. Based on the case described above, if you create a Completion with Backflush for 100 of 200 Widgets, NetSuite will issue components for 100 assemblies and the GL impact will be $1,000 as expected. You will also be left with 100 remaining to build as expected.

The downside to this work-around is that the components are not in WIP until the completion is entered, which defies a portion of the general purpose of WIP tracking. The inventory will remain Committed but On Hand until the Backflush operation is triggered on the completion. In the case of the standard Issue Components, the inventory is removed from On Hand and is fully in WIP.

To Create a Work Order Completion with Backflush, set the field value of the “Backflush” Checkbox field to True or Checked:

Do not allow partial completions.

 

If you currently utilize the issue of components with purpose and are you tracking inventory in WIP metrics for visibility and decision making, this is not an option for you and your operational process should include avoiding partial completions. It must be assumed that 100% of the issued components will be consumed, you must either Complete 100% of the intended build quantity or enter scrap to account for the true loss of components in the process.

The combination of a Work Order Issue and partial completions is not effective from an accounting standpoint. The best option presented is to utilize the Completion with Backflush option and accept that component inventory will not be issued into WIP prior to completion. The use of the Completion with Backflush is the only method to allow for multiple partial completions from a single Work Order without the accounting complications related to the Average Cost and the validity of the GL impact in and out of WIP.

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