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iNTERNAL LABOUR COST IN WARRANTY

Former Member
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Hi,

Our client want to flow the cost of internal labour captured through activity type in warranty order to FI. Since internal labour is salaried employee of the company they also want an offseting entry to salary absorption a/c.

i.e a jv entry shoud be

waranty cost dr

    To salary absorption a/c.

Please guide me on the warranty order process for the above senario, can i do it by putting a GL in settlement rule of warranty order (IW31)

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Former Member
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Hi Lalit,

As far as I am aware, the accounting behind warranties goes something like this.

You are talking about 2 specific scenarios. Firstly, there is the labour costs involved in accounting for warranty work. Secondly, there is the accounting behind the warranty itself.

Rightly so, warranty work would be carried out by a Productive employee. This would mean that the employee sells his/her time on behalf of the business.

This rate of sale is grouped according to the classification of work being carried out by the business. Notably, you would have:

  • full(retail) labour rate
  • internal labour rate
  • warranty labour rate

These distinctions are drawn so that the correct rate is billed on the labour time card and can therefore be accounted for. Warranty labour expense cannot be charged to the customer, therefore the cost of the labour worked is offset against the profit margin. This margin would usually include Sales less Cost of Sales as well as a rebate or kick back from a 3rd-Party warranty underwriter.

In conclusion, when a warranty is sold and the margins are realized, a 'warranty liability' should be raised as well as an expense account. Those warranty labour cost is posted to that liability account which declines in value over time through the warranty expense passed periodically.

Hope this Helps,

Devon Abraham

Follow me : @_Devon_Abraham

Former Member
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Thanks for reply Devon......this is really helpful

Former Member
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My pleasure Lalit. Glad I could help.