WORK IN PROCESS - Special Topic PJ-15

This topic discusses Work In Process (WIP) projects in general, their setup, their relation to Cost of Goods Sold (COGS), and the processing sequence required to ensure they are accounted for properly.

In general, projects are defined as WIP if they are used to accumulate costs for a task that can neither bill nor recognize revenue until specific milestones have been reached. Therefore, you may want to capitalize these costs on the balance sheet. These costs are treated as assets, that is, inventory, until they are transferred to the income statement as COGS. You can have this transfer completed automatically in Costpoint via the COGS journal entry.

Included with the COGS journal entry is an option to capitalize the G&A applied to WIP. If you recognize WIP G&A as a period cost, you can choose not to capitalize it when determining your net inventory balance.

Once you have posted the COGS entry and performed the necessary processing (such as Compute Burden Cost and Update Project Status Report Table), you can print a Project Status Report that shows the project amounts in relation to both the Balance Sheet and Income Statement. In the Balance Sheet section, the component costs will be burdened per your company's cost pool setup and will therefore reflect the true WIP cost of the project. These WIP costs will be reduced by the WIP transfer amount to arrive at the Net Inventory Balance. In the Income Statement section, revenue based on the WIP costs for the project will be reduced by the amount of COGS to arrive at the profit.

Project Setup

The setup for WIP projects differs in some respects from the setup of other types of projects. Some of the similarities and differences are noted.

In the Basic Info screen, the Project Classification for WIP projects must be Work In Process. The available classifications are pre-set in Costpoint. There is no rule for the Project Type; it can be any designated type, but for clarity you may want to call it Inventory or Manufacture to distinguish it from other projects. Establish project types in the Maintain Project Types screen.

You should establish an account group specifically for WIP projects in the Project Account Groups screen. This group should include asset accounts, designated as project-required in the Maintain Accounts screen, and will be used to collect the project costs. These accounts will be capitalized on the balance sheet until they are transferred via the COGS journal entry. They should point to asset lines on the financial statement setup. Examples of these are Labor, Other Direct Costs, and Inventory. In the Project Account Groups screen, designate these accounts with a Function Code of LABOR or NON-LABOR, as usual. In addition, one account with a Function Code of WIP TRANS OUT and one account with a Function Code of COST GOODS SOLD should also be in the group. The purpose of the WIP TRANS OUT account is to credit the WIP assets from the balance sheet. This account should be an asset, project-required, and pointed to an asset financial statement line, such as inventory, to decrease this balance when posted. The COST GOODS SOLD account carries the expense as a debit on the income statement. This account should be a Non-Labor Expense, project-required, and pointed to an expense financial statement line. You must set up the WIP TRANS OUT and COST GOODS SOLD accounts at the level of the project where the COGS formula resides so that the account numbers are available for posting. For billing and revenue recognition purposes, there should also be one account each with the function codes of BILLED A/R, UNBILLED-GENERL, and REVENUE.

The pool debit allocation accounts, which are applying burden to WIP costs, should also be pointed to asset financial statement lines on the balance sheet. This will ensure the Net Inventory Balance, as reported on the WIP PSR, matches the inventory line(s) on the balance sheet. Note that if you are not capitalizing the G&A applied to WIP, the debit allocation account for this pool should be pointed to an expense account line on the income statement.

The asset accounts should be included in the bases of any pools from which they will be burdened. If you want to apply G&A to COGS, the account with the COST GOODS SOLD Function Code should be included in the base of G&A. Note that you should use this configuration only if you are not capitalizing G&A.

Three check boxes in the Project Settings screen relate to WIP projects:  Apply G&A to WIP, Capitalize G&A Applied to WIP, and Present WIP G&A on PSR Profit & Loss. You should use these check boxes only to include information on the Project Status Reports. These check boxes affect only what is included or not included in the net inventory balance. See the bullets for more details.

Establish the Revenue Formula in the Basic Revenue Info screen, as usual. If the formula involves cost incurred, the basis for this calculation will be Total WIP Costs. For example, if you are using the Cost Plus Fee on Cost formula and want to recognize an eight percent fee, this fee will be applied to Total WIP Costs to formulate the revenue amount. However, for purposes of calculating the profit and profit percentage, the COGS and Burden Applied to COGS, if applicable, will be subtracted from Revenue.

Set up billings using the usual method. Transactions with function codes of LABOR and NON-LABOR will still be posted to Maintain Open Billing Detail and be eligible for inclusion on the bill. Because the WIP TRANS OUT and COST GOODS SOLD accounts do not populate Open Billing Detail, these are not included on any bills.

When initializing the project's prior years cost in the Prior Year Cost and Revenue screen, enter zero for any Allowed columns (for example, Direct Amount Allowed, Burden Amount Allowed) for the WIP TRANS OUT and COGS accounts. This ensures that no revenue is entered for these accounts. Even though these should negate each other, the Compute Revenue process is more efficient if there are no allowed amounts to consider for these accounts.

In the Project Settings screen, you must set three fields correctly to ensure that the WIP projects are presented properly:

• Apply G&A to WIP: This check box is for informational purposes and serves as a prompt to the other options on this screen. This check box defaults to cleared, which assumes that G&A will not be applied to projects that have a classification of "Work In Process." If this check box is not selected, the Capitalize G&A Applied to WIP and WIP G&A Pool Type fields will not apply. Please note that, if you select this check box, the WIP costs will not automatically be burdened with G&A. You control how this or any pool is burdened in the Cost Pools screen and subtasks. Even if you do not select this check box, the cost pools will still burden the WIP costs if they are set up to do so.

• Capitalize G&A Applied to WIP: This check box will not be available unless you select the Apply G&A to WIP check box. When available, this check box defaults to cleared. This indicates the G&A that is applied to WIP projects will not be capitalized and, therefore, will be subtracted from Total WIP Costs, along with the WIP Transfer, to arrive at Net Inventory Balance. It will be displayed on a separate line on the WIP PSR. If you select this check box, the G&A that is applied to WIP projects will be capitalized and, therefore, will be not be subtracted from Total WIP Costs to form Net Inventory Balance. Also, the WIP G&A Pool Type field will not be active.

• WIP G&A Pool Type: This field is available only if you select the Apply G&A to WIP check box and do not select the Capitalize G&A Applied to WIP check box. If you are applying G&A to WIP and do not want to capitalize this G&A, it will be subtracted from Total WIP Costs, along with the WIP Transfer, to arrive at Net Inventory Balance. You can use this check box to designate which pool type is to be subtracted from Total WIP costs. Without this selection, Costpoint will not know which pools are G&A. Any pool with the pool type designated here, and which is applicable to the project, will be subtracted from Total WIP Costs.

Cost of Goods Sold

The setup of the Cost of Goods Sold screen determines the amount that will be transferred by the COGS journal entry. The system uses this amount to determine the profit recognized by the WIP project.

 As noted in the documentation for this screen, you can select one of seven COGS formulas from the Calculation Method drop-down list:

1.   Billed Amount, Estimate at Completion

Select this calculation method to recognize COGS based on the Estimated Cost at Completion as a percentage of Estimated Contract Value multiplied by the Billed Amount. This selection also gives you the option to recognize an ITD loss up-front instead of prorating it throughout the life of the project. To use this option, you must complete the Estimated Total Value and Estimated Costs fields. If you enter the same total cost or total value amount displayed in the Project Values group box, the system will assume that you want these fields to equal the amount of modifications that have been entered for this project, and they will be updated whenever you enter a new modification. If you enter an amount that is different from the total cost or total value amount, the system will not automatically update whenever a new modification is entered, and you must update this field manually. If you want to recognize an ITD loss up-front, complete the ITD Loss Recognized field. Make any changes to these three fields before computing the COGS entry.

To calculate COGS using this option, the system subtracts the ITD Loss Recognized, if applicable, from the estimated cost at completion (the Estimated Costs field) and divides the result by the Estimated Total Value. It multiplies the resulting cost percent by the ITD Amount Billed, from the Maintain Project Bill Summary screen, up to and including the fiscal year and period being calculated, to arrive at the COGS Before Loss. It adds the ITD Loss Recognized to COGS Before Loss to arrive at the final COGS amount. Each time you execute the Compute Cost of Goods Sold Entry screen, the balance of the general ledger account designated with the WIP TRANS OUT Function Code for that project's account group is summarized for the fiscal year, including the beginning balance, up to and including the period of calculation. The system subtracts this amount, which is the COGS already posted inception-to-date, from the COGS calculation amount to arrive at the amount to post. The owning organization of the project is used for calculation and posting purposes. Because this method is dependent on the billings, you must set it up at the same level as the invoice project in the Project Billing Info screen.

Example:

80,000/80,000 = 100%        Subtotal/Estimated Total Value = Cost Percent

2.   Billed Amount, Estimate to Complete

Select this Calculation Method to recognize COGS based on the Estimated Cost to Complete as a percentage of Estimated Contract Value multiplied by the Billed Amount. To use this option, you must complete the Estimated Total Value and Estimated Costs fields. If you enter the same total cost or total value amount displayed in the Project Values group box, the system will assume that you want these fields to equal the amount of modifications that have been entered for this project, and they will be updated whenever you enter a new modification. If you enter an amount that is different from the total cost or total value amount, the system will not automatically update whenever a new modification is entered, and you must update this field manually. This selection also gives you the option to recognize an ITD loss up-front instead of prorating it throughout the life of the project. If you want to recognize an ITD loss up-front, complete the ITD Loss Recognized field. Make any changes to these three fields before computing the COGS entry.

To calculate COGS using this option, the system adds the estimated cost to complete (the Estimated Costs field) to the Total WIP Costs to arrive at Total Costs at Completion. It then subtracts the ITD Loss Recognized, if applicable, from the Total Costs at Completion and divides the result by the Estimated Total Value. The resulting cost percent is then multiplied by the ITD Amount Billed, from the Maintain Project Bill Summary screen, up to and including the fiscal year and period being calculated, to arrive at the COGS Before Loss. The ITD Loss Recognized is then added to COGS Before Loss to arrive at the final COGS amount. Each time you execute the Compute Cost of Goods Sold Entry screen, the balance of the general ledger account designated with the WIP TRANS OUT Function Code for that project's account group is summarized for the fiscal year, including the beginning balance, up to and including the period of calculation. This amount, which is the COGS already posted Inception-To-Date, is subtracted from the COGS calculation amount to arrive at the amount to post. The owning organization of the project is used for calculation and posting purposes. Because this method is dependent on the billings, you must set it up at the same level as the invoice project in the Project Billing Info screen.

Example:

100,000/100,000 = 100%        Subtotal/Estimated Total Value = Cost Percent

3.   Delivery Amount, Estimate at Completion

Select this calculation method to recognize COGS based on the Estimated Cost at Completion as a percentage of Estimated Contract Value multiplied by the Delivery Amount. This method applies only to projects that bill using government form 1443, Contractor's Request for Progress Payment. With this type of billing, delivery invoices are used whenever a finished good is shipped. This selection also gives you the option to recognize an ITD loss up-front instead of prorating it throughout the life of the project. To use this option, you must complete the Estimated Total Value and Estimated Costs fields. If you enter the same total cost or total value amount that is displayed in the Project Values group box, the system will assume that you want this field to equal the amount of modifications that have been entered for this project, and it will be updated whenever a new modification is entered. If you enter an amount that is different from the total cost or total value amount, the system will not automatically update whenever you enter a new modification, and you must update this field manually. If you want to recognize an ITD loss up-front, complete the ITD Loss Recognized field. Make any changes to these three fields before computing the COGS entry.

To calculate COGS using this option, the system subtracts the ITD Loss Recognized, if applicable, from the estimated cost at completion (the Estimated Costs field) and divides the result by the Estimated Total Value. It then multiplies the resulting cost percent by the ITD Delivery Amount, from the Maintain Project Bill Summary screen, up to and including the fiscal year and period being calculated, to arrive at the COGS Before Loss. It adds the ITD Loss Recognized to COGS Before Loss to arrive at the final COGS amount. Each time you execute the Compute Cost of Goods Sold Entry screen, the balance of the general ledger account designated with the WIP TRANS OUT Function Code for that project's account group is summarized for the fiscal year, including the beginning balance, up to and including the period of calculation. The system subtracts this amount, which is the COGS already posted inception-to-date, from the COGS calculation amount to arrive at the amount to post. The owning organization of the project is used for calculation and posting purposes. Because this method uses delivery invoices for Progress Payment bills, it must be set up at the top level of the project.

Example:

80,000/80,000 = 100%        Subtotal/Estimated Total Value = Cost Percent

4.   Delivery Amount, Estimate to Complete

Select this calculation method to recognize COGS based on the Estimated Cost to Complete as a percentage of Estimated Contract Value multiplied by the Delivery Amount. This method is applicable only for projects that bill using government form 1443, Contractor's Request for Progress Payment. With this type of billing, delivery invoices are used whenever a finished good is shipped. To use this option, you must complete the Estimated Total Value and Estimated Costs fields. If you enter the same total cost or total value amount that is displayed in the Project Values group box, the system will assume that you want this field to equal the amount of modifications that have been entered for this project, and it will be updated whenever a new modification is entered. If you enter an amount that is different from the total cost or total value amount, the system will not automatically update whenever a new modification is entered, and you must update this field manually. This selection also gives you the option to recognize an ITD loss up-front instead of prorating it throughout the life of the project. If you want to recognize an ITD loss up-front, complete the ITD Loss Recognized field. Make any changes to these three fields before computing the COGS entry.

To calculate COGS using this option, the system adds the estimated cost to complete (the Estimated Costs field) to the Total WIP Costs to arrive at Total Costs at Completion. It then subtracts the ITD Loss Recognized, if applicable, from the Total Costs at Completion and divides the result by the Estimated Total Value. It multiplies the resulting cost percent by the ITD Delivery Amount from the Maintain Project Bill Summary screen, up to and including the fiscal year and period being calculated, to arrive at the COGS Before Loss. It adds the ITD Loss Recognized to COGS Before Loss to arrive at the final COGS amount. Each time you execute the Compute Cost of Goods Sold Entry screen, the balance of the general ledger account designated with the WIP TRANS OUT Function Code for that project's account group is summarized for the fiscal year, including the beginning balance, up to and including the period of calculation. This amount, which is the COGS already posted Inception-To-Date, is subtracted from the COGS calculation amount to arrive at the amount to post. The owning organization of the project is used for calculation and posting purposes. Because this method uses delivery invoices for Progress Payment bills, you must set it up at the top level of the project.

Example:

100,000/200,000 = 50%        Subtotal/Estimated Total Value = Cost Percent

5.   Percent of Costs

If you want to recognize COGS based on a percentage of costs, select this calculation method and complete the Percent of Estimated Costs field. The system multiplies the percent entered by the Estimated Costs field to arrive at the COGS.

Each time you execute the Compute Cost of Goods Sold Entry screen, the balance of the general ledger account designated with the WIP TRANS OUT Function Code for that project's account group is summarized for the fiscal year, including the beginning balance, up to and including the period of calculation. This amount, which is the COGS already posted Inception-To-Date, is subtracted from the COGS calculation amount to arrive at the amount to post. The owning organization of the project is used for calculation and posting purposes. Because this method is not dependent on billings, you can enter it at any level.

Example:

6.   Fixed Monthly Amount

If you want to recognize COGS based on a fixed monthly amount, select this calculation method and complete the Fixed Monthly Amount field. This will be the amount that you want recognized monthly as the COGS for this project. No other fields on this screen apply. Each time you execute the Compute Cost of Goods Sold Entry screen, the balance of the general ledger account designated with the WIP TRANS OUT Function Code for that project's account group is summarized for the fiscal year and period of calculation. This amount, which is the COGS already posted for the period, is subtracted from the COGS fixed monthly amount to arrive at the amount to post. The owning organization of the project is used for calculation and posting purposes. Because this method is not dependent on billings, you can enter it at any level.

7.   Revenue Greater Than Zero

If you use this method, the total WIP costs will be used as the inception-to-date COGS if the revenue is greater than zero. If the revenue on the project is zero, no COGS journal entry will be created.

The system sums the TOT_REV_TGT/ACT_AMT (depending on whether target or actual is selected in the screen) in the PROJ_SUM table and determines whether the revenue exceeds zero. If the revenue exceeds zero, the SUB_DIR_AMT and SUB_ACT/TGT_BURD_AMT will be summed for all labor, non-labor, unallowable-labor, unallowable non-labor, and units functions codes. This amount will become the Total WIP costs, and it will be used as the COGS entry. 

The balance of the general ledger account designated with the WIP TRANS OUT Function Code for that project's account group is summarized for the fiscal year and period of calculation. The system subtracts this amount, which is the COGS already posted for the year, from the Total WIP Costs calculated previously to arrive at the amount to post. The owning organization of the project is used for calculation and posting purposes.

8. Percent of ITD Revenue

If you use this method, the total WIP costs are used as the inception-to-date COGS if the revenue is greater than zero. If the revenue on the project is zero, no COGS journal entry is created.

The system sums the TOT_REV_TGT/ACT_AMT (depending on whether target or actual is selected in the screen) in the PROJ_SUM table and the TOT_REV_AMT from PSR_PY_SUM and multiplies these amounts by the Percent of Revenue entered in the Cost of Goods Sold screen.  This amount becomes the total WIP costs, and it is used as the COGS entry.  

The balance of the general ledger account designated with the WIP TRANS OUT Function Code for that project's account group is summarized for the fiscal year and period of calculation. The system subtracts this amount, which is the COGS already posted for the year, from the total WIP costs calculated previously to arrive at the amount to post. The owning organization of the project is used for calculation and posting purposes.

9. Percent of Current Year Revenue

If you use this method, the total WIP costs are used as the current period COGS if the revenue is greater than zero. If the revenue on the project is zero, no COGS journal entry is created.

The system sums the TOT_REV_TGT/ACT_AMT (depending on whether target or actual is selected in the screen) for the period selected in the PROJ_SUM table and multiplies these amounts by the Percent of Revenue entered in the Cost of Goods Sold screen. This amount becomes the total WIP costs, and it will be used as the COGS entry.  

The balance of the general ledger account designated with the WIP TRANS OUT Function Code for that project's account group is summarized for the period of calculation. The system subtracts this amount, which is the COGS already posted for the year, from the total WIP costs calculated previously to arrive at the amount to post. The owning organization of the project is used for calculation and posting purposes.

Processing

Billed Amount, Estimate at Completion

Because this formula is based on billed amounts, you must post bills before proceeding with the COGS processing. You should compute the COGS entry (the Compute Cost of Goods Sold Entry screen), post it, and then run the Compute Burden Cost screen and the Compute Revenue screen. If you want a WIP Project Status Report, you must run the Update Project Status Report Table screen before printing the report.

Billed Amount, Estimate to Complete

Because this formula is based on billed amounts, you must post bills before proceeding with the COGS processing. Next, run the Compute Burden Cost screen to ensure the WIP costs have been updated for inclusion in the COGS entry. Then, compute the COGS entry (the Compute Cost of Goods Sold Entry screen) and post it. After posting the COGS entry, run the Compute Burden Cost screen again, followed by the Compute Revenue screen. If you want a WIP Project Status Report, you must run the Update Project Status Report Table screen before printing the report.

Delivery Amount, Estimate at Completion

Because this formula is based on billed delivery amounts, you must post delivery invoices before proceeding with the COGS processing. You should compute the COGS entry (the Compute Cost of Goods Sold Entry screen), post it, and then run the Compute Burden Cost screen and Compute Revenue screen. If you want a WIP Project Status Report, you must run the Update Project Status Report Table screen before printing the report.

Delivery Amount, Estimate to Complete

Because this formula is based on billed delivery amounts, you must post delivery invoices before proceeding with the COGS processing. Next, run the Compute Burden Cost screen in Costpoint Cost and Revenue Processing to ensure the WIP costs have been updated for inclusion in the COGS entry. Then, compute the COGS entry (the Compute Cost of Goods Sold Entry screen) and post it. After posting the COGS entry, run the Compute Burden Cost screen again, followed by Compute Revenue screen. If you want a WIP Project Status Report, you must run the Update Project Status Report Table screen before printing the report.

Percent of Costs

When using the "Percent of Costs" method, you can compute the COGS entry at any time (the Compute Cost of Goods Sold Entry screen). After posting the COGS entry, run the Compute Burden Cost screen again, followed by Compute Revenue screen. If you want a WIP Project Status Report, you must run the Update Project Status Report Table screen before printing the report.

Fixed Monthly Amount

You can compute the COGS entry at any time (the Compute Cost of Goods Sold Entry screen). After posting the COGS entry, run the Compute Burden Cost screen again, followed by Compute Revenue screen. If you want a WIP Project Status Report, you must run the Update Project Status Report Table screen before printing the report.

Revenue Greater than Zero

Because this formula uses total revenue as part of its calculation, you must compute all revenue for the period before running the Compute Cost of Goods Sold Entry screen. If the revenue on the project that is at or below the level of the cost of goods sold formula is greater than zero, the system uses the Total WIP Costs for the COGS entry.