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Bloody WIP confusing me...

Engineering co. WIP client confusing me

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Engineering company, we normally do annual accounts, however we are now going to be helping them with their monthly management accounts to get a better handle on the performance

The company does work, each job worth around say 8K.  Gross margin is 28% after materials and subcontract labour.  Subcontractors paid weekly, materials paid 45-60 days.

Client is now providing a handwritten "WIP statement" which reads:  I.e. Job value 8,000, 75% complete,  billed so far Nil, WIP = 6,000

Client is insisting that 28% of the 6,000 WIP should be accounted for i.e. Cr sales 6K, Dr balance sheet 6K under WIP.

I would just add the full 6,000 WIP to sales and debit the balance sheet WIP account on the basis that most of the associated costs have already been paid/invoiced (subbies & materials), so to NOT show the 6K in sales would understate the profit.

Do people agree?

 

Replies (6)

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By johngroganjga
25th Jul 2016 04:01

Yes of course that's right. Doing it the client's way you would be valuing a job expected to yield a profit at less than cost.

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By lionofludesch
25th Jul 2016 07:27

Well, I agree with you but they're management accounts so he can did as he likes, I suppose.

Just make sure he knows he's wrong. The cost of WIP is not 28%, it's the other 72%.

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By tom123
25th Jul 2016 08:59

Are you sure the associated costs have been coded to P&L?

Or, is there a chance the costs are also coded to the WIP account and released at some point upon completion?

Personally, if I had the systems to track this, I would be coding the costs to the balance sheet.

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By TerryD
25th Jul 2016 11:14

Assuming you know that the job will be profitable, then surely the correct entries are credit sales £6,000, debit debtors £6,000. Then you need to establish the actual costs incurred so far on the job and enter a prepayment or creditor to make them come to 75% of the total expected costs. Thus the profit accrues in line with the progress on the job. The only time you'll have any WIP in the accounts will be if they do any speculative work, i.e. not in response to a specific order, and that will be valued at its direct cost.

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Replying to TerryD:
By johngroganjga
25th Jul 2016 13:24

Don't think it's debit debtors unless the job is complete and invoiced. That's what WIP is.

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By TerryD
25th Jul 2016 13:41

No, it's a debtor (see FRSSE para 4.1, as well as previous standards). It's normally called "Amounts recoverable on contracts". These days, WIP arises only where the product/service is not "pre-sold".

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