Background:
Project Falcon is a six-month project initiated on January 1, undertaken by ABC Manufacturing. The project involves the design and production of a custom machine part for a client. The contract stipulates that billing occurs upon project completion, but ABC Manufacturing records costs monthly and needs to report the financial position accurately each month.
Using the WIP Functionalities:
Step 1: Calculate WIP
Situation:
It's January 31, and ABC Manufacturing needs to calculate the WIP for Project Falcon for the first month.
Action:
The project manager navigates to the 'Jobs' module, selects Project Falcon, and clicks 'Calculate WIP'. They use the 'Completed Contract' method, as revenue recognition is at the end of the project. The calculation considers all labor, materials, and overheads incurred during January. The system generates a WIP entry, but nothing is posted to the General Ledger yet.
Step 2: Review WIP Entries
Situation:
Before posting anything to the General Ledger, the project manager wants to ensure the WIP calculation is correct.
Action:
They review the 'WIP Entries' associated with Project Falcon to confirm that all costs have been appropriately captured. If any discrepancies are found, they can be investigated and corrected before impacting the financial statements.
Step 3: Post WIP to G/L
Situation:
With the WIP entries confirmed as accurate, the next step is to reflect this in the General Ledger for January's financial reporting.
Action:
The project manager selects 'Post WIP to G/L' to make the official entry. The system then updates the financial statements, adding the WIP amount to the balance sheet under 'Work in Progress' assets.
Step 4: WIP G/L Entries
Situation:
The accounting department is preparing to close the books for January and needs to verify that all job costs have been accounted for correctly.
Action:
The accountant reviews the 'WIP G/L Entries' to see the direct impact of the WIP posting on the General Ledger. They confirm the increase in assets (WIP) and the corresponding entry that balances it, typically a liability or equity account, depending on the company's accounting policies.
By February 28, the same process is repeated to reflect another month's worth of WIP. This continues each month until the end of June when Project Falcon is completed. Upon completion, the final billing is carried out, the WIP is reversed out of the balance sheet, and the revenue is recognized in the profit and loss statement.
This cyclical process allows ABC Manufacturing to maintain accurate financial reporting during the project, ensure compliance with accounting standards, and manage their cash flow effectively, despite the client being billed only at the end of the project.
