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ERP and manufacturing module: managing WIP

Gaia Tedeschi,

Automobile manufacturing uses many raw materials that have to be accounted for in the production process

So what is WIP? I'd like to explain WIP or work in progress to distinguish it from ''semi-finished goods ''. Very frequently, the two terms are used interchangeably but it is a little more complicated than this.

WIP is a mix of raw materials, semi-finished or even finished products, which are placed in a new production process but is not yet completed.

To put it simply, it is as if you wanted to uncover a pan where the ingredients were recently made for a sauce of a dish at the restaurant. This semi-finished product, bearing in mind the metaphor above, is only the cooked sauce. In the grander scheme of things, you still have to cook the pasta and add the sauce to produce finished product.

Here, we see the semifinished product represents only one stage of manufacturing of the finished product. However, unlike the WIP, a semi-finished product already has its own physical and commercial identity.

By treating the issue in more orthodox tones, from an accounting point of view, the WIP represents the aggregated costs necessary for the realization of the finished product.The analytical account opened to the recognition of WIP are loaded costs of materials used in the entrance, the cost of labor used (whether direct or indirect), the cost of machines, their consumption and other tools necessary to produce the product.

WIP accounts and distinguishing them from semi-finished goods are important in manufacturing

Meanwhile, the semi-finished product is something more than an aggregate of costs - this already has a physical identity. The semi-finished products are in fact equipped with their own identification code and may be available for sale or can continue within the production process.

The more the company's production process is sustained, the more the concept of WIP becomes more relevant. Because of this, it becomes more necessary for the controller to focus on the following aspects:

● Cost of monitoring WIP, attributing the costs of labor, raw materials inventory and the account that includes industrial indirect costs on the ''production account'' (or WIP account). This highlights the storage of products in progress.

● The methodology by which the end of each accounting period is established,  how much of the total of the finished products is represented by WIP units using the same completion percentage. The completion percentage represents the resource costs that any WIP units used in relation to the total resources required to achieve the finished product.

For the moment, let us confine ourselves to the first of the preceding two paragraphs. In this case, the ERP should allow monitoring and correctly attribute the costs to WIP by:

● Presence of an analytical accounting plan; which allows you to assign levels of an item of the production account (or WIP account), an account for rejects and an account for the differences in the cost of WIP .

● Production cycles, tracked step by step through different types of transaction or different states of the same work order:

a. Opening of a new work order, which requires the necessary materials according to the Bill of Materials and empties the stock of raw materials on the production account (or WIP account) of the finished product.

b. Completion of the work order, which drains the production account and loads the finished products warehouse account.

c. Closure of the work order, which will enable the realized order to make an analysis of the deviations in quantity and value.

● The detection of rejects during the advancement of the work order

● Mapping and enhancement of various categories of industrial indirect costs, each of which must be divided among the accounts according to appropriate allocation coefficients

● Possibility of being able to assign to each phase of  information such as machining centers involved and related machinery, required number of direct workers, man hours and machine hours required.

WIP and semi-finished goods can be distinguised just like ingredients in a dish

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