Accounting entry - WIP, Variance Calculation & Settlement of Production Orders

[Former Member]

Hi All,

Please explain the process of WIP calculation, variance and settlement of production orders. At each stage will there be an accounting entry generated?

1. WIP calculation: All production orders for which the status is REL at the month end will be included in WIP calculation. How the amount of WIP is derived and what will be the accounting entry.

2. Variance calculation: Production order needs to have the status TECHO in order to do the variance settlement. Will there be an accounting action and how the amount will be calculated?

3. Settlement of Production Orders: Dr. WIP A/c (Balance Sheet a/c)

                                                    Cr. Volume Variance WIP a/c (P&L Account)

    Is this the correct accounting entry? If yes, please advice how the WIP a/c is showing balance on settlement of production order, how it will get nullified? If no, please advise on the correct process?

Regards

[Former Member · Accepted solution]

Dear Andy,

Answers to your questions as follows

1) WIP amount is the difference between the actual debit and actual credit in the order provided the status of the order is NOT TECO OR DLV. Also ,only WIP Calculation will not create an entry in FI. System will just calculate the amount of WIP for the order.

2) When the status of the order is TECO or DLV, system cancels the WIP created previously,if any, on the order and calculates the variance. Again the variance is the difference between Actual debit and actual credit in the order. NO FI entry is created at the time of variance calculation. System only calculates the variance on the order

3) In settlement of the order, entry regarding reversal / creation of WIP and variance is passed in FI.

For Variance entry , both debit and credit will be posted to P & L hence there is NO impact over the profitability.

In case of WIP, the entry you have mentioned is correct as far as Balance sheet and P & l accounts are concerned. The description of P & L account should preferably be " Change in WIP" instead of Volume variance WIP.

Once the status of order is changed to DLV or TECO, system reverse the WIP entry for the order which had a status other than DLV or TECO in previous period,and that way it is nullified.

First , system assumes to carry out WIP calculation , then variance calculation and then Settlement of production order.

regards,

Makrand

[Muhammad-Humayun-FICO]

Dear All,

1st of all, we should understand the concept of cost by order which will make our understanding of WIP easy. In product cost by order, we can calculate either WIP or Variance as we can't calculate both. It depends on the status of the order; if the status of an order is REL, only then WIP can be calculated. Accounting entry is also generated which is :

WIP A/c(bal.sheet)Dr. and change in WIP A/c(P&L) Cr.

Note#1: as all these activities are done at the month end and if the status of an order gets changed to Delivered or TECO, then only variances can be calculated and then settled.

Variance entry:

COGM Dr/Cr.

Variance A/C Dr./Cr.

Note#2. Hence, WIP or Variance totally depends on the status of an order unlike product cost by period in which we can have both WIP and variance in product cost collector. 

[rajneesh_saxena]

Dear Andy

In product cost by order scenario the WIP or Variance calculation is dependent on order status. If the Order has a status of REL or PDLV, the system will calculate WIP and if the order status is DLV or TECO the system will calculate variance on this order. At the time of calculation of WIP or Variance no accounting entry i generated but when you settle the order at that time FI documents are passed in the books.

Ans1-  In product cost by order WIP or variance is calculated based on the actual cost debited to the order and value of GR made to the order. System does calculation by the formula GR value-(GI value+Activity value+ Overheads)

Ans2-  As I said at the time of calculation no FI entries are passed but at the time of settlement FI entries are generated. The method of calculation is the same as described in Ans1.

Ans3- Entry at WIP settlement WIP (P&L) a/c Dr and WIP Offsetting(B/S a/c) Cr.

          Entry at variance settlement : Variance a/c dr/cr and COGM cr/dr.

          and if there is already a WIP posted for this order then at settlement WIP entry is reversed provided we have calculated WIP again the the month of settlement of variance

Note for Anand: Dear Anand we need to calculate WIP again in the period when the order status  is changed to DLV or TECO otherwise system will not pass reversal entry of WIP. Kindly test it in your IDES and let me know if you find something on the contrary.

Regards

Rajneesh Saxena

[Former Member]

Thank you Rajneesh & Makrand. It is very helpful explanation

However, still some questions...

1. If no WIP entry is passed on WIP calculation at the month end...how to identify in FI what is WIP stock?

2. Even WIP calculation is executed for a production order, system even allows again and again to execute WIP calculation for the same order in the same month. Is it normal behavior of the system. If yes, what is the reason behind it?

3. In my scenario, on settlement of production order only this accounting entry is generated

                                    Dr. WIP A/c (Balance Sheet a/c)

                                    Cr. Volume Variance WIP a/c (P&L Account)

No accounting for variance is generated. What is missing?

Please advise.

Regards

[rajneesh_saxena]

Dear Andy

1  Through FI you can only see your WIP GL I believe.

2  At the time of calculation as I said earlier also system do not pass any FI entry it only records the WIP value so you are allowed to re iterate this transaction. It is standard behavior of SAP.

3  You WIP entry is correct, by mistake I wrote reverse entry at first line of 3rd point. I apologies for my mistake. If the order is in DLV or TECO state then the system will calculate variance and at settlement FI entry will be passed.

Regards

Rajneesh Saxena

[Former Member]

Dear Ajay,

As Rajneesh sir has explained very well, just some additions to answer you as follows.

1) From the GL of WIP in FI , you can see the WIP value. If entry is not passed for WIP at the time of settlement, that means there are NO new orders in WIP or the status of the orders for which WIP was calculated in previous periods has not been changed in the period concerned.

2) It is the normal behavior of the system to allow to calculate the WIP as it is done in RA calculation.

3) The period in which the status of the order changes to DLV or TECO, system will reverse the WIP entry , if any, posted in the previous period and entry for Variance will be generated. So, only WIP entry is created means, the status of the order is NOT TECO or DLV hence variance entry is not passed. Hence nothing is missing.

Regards,

Makrand

[Former Member]

Thank you Rajneesh & Makrand

[Former Member]

Dear Rajneesh,

I am still confused on the part of WIP calculation.

How can the effect of WIP will be seen in FI because at the time of WIP calculation no accounting entry is generated. Only the value is being calculated. Say for example if the business wants to know the WIP stock amount at the month end. If there are no accounting postings then the value will not be flown to GL's.

Sorry but still in doubt

[rajneesh_saxena]

Dear Andy

I am afraid there is no standard report for the purpose (at least to my knowledge) however you can get it done with the help of ABAP reports of also you can create a report using report painter.

Regards

Rajneesh Saxena

[rajneesh_saxena]

Dear Andy

To add to my reply I have uploaded a document for such report, which I prepared using report write. You can see the below mentioned thread:

Regards

Rajneesh Saxena

[Former Member]

Hi,

The WIP entry will get reversed when you calculate variance and do settlement again. So that the WIP will be nullified.

When you change the order status to teco or dlv, we can calculate the Variance and same can be settled. So this time system will generate variance entry and it will reverse WIP entry.

Regards

Anand.

[Former Member]

So at 1st settlement A/c entry is Dr WIP Inventory A/c and Cr Change in WIP A/c.

After changing the status to TECO or DLV and when we calculate variance and do settelment system will pass 2 entries.

1. Dr COGM A/c and Cr Production Variance A/c
2. Dr Change in WIP A/c and Cr WIP inventory A/c.

In this way WIP will be nullified.

Regards

Anand