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Recording and tracking the value of work in process is not as simple as recording and tracking the value of material stock. Materials in the manufacturing or retail industry are commonly delivered with a delivery note, making it easy to record their arrival at the warehouse and their value in the stock account. Once they have been ‘counted’, regular inventory procedures ensure that they are valued at the correct amount taking into account the use of the goods for production or other purposes (eg internally), shrinkage or spoilage. They are then “counted”, when they have been used for the final delivered manufacturing product or when they are sold.
In the creative industry, as in other service-based industries, work-in-progress being a non-material value, delivery notes generally being, inventories generally out of the question.
However, the only thing that disembodied WIP and material stock purchases have in common is a purchase invoice. However, even invoiced by a provider does not necessarily mean that those values are still in process, since the end service for which they are being used (for example, an advertising campaign) could already have been invoiced to the client, generating revenue.
Therefore, many companies record incoming purchase invoices as costs immediately, and the finance department performs regular (monthly) manual adjustment journals between work in process and cost of sales, based on the value of sales invoices. for the same month. Ideally, records of which projects have incurred costs will allow them to base their adjustments on cost allocation and billing for the same projects. Even if the last allowance is applied, a lump sum adjustment journal is not a scientific way to link correct costs to correct revenues. If at some point a report is required detailing which projects have which potential costs that are in work in progress at a specific time, this cannot be easily seen in the journal entry. Additional consultation of job boards or other records on which the journal was based is necessary.
Other companies take a different approach. They calculate WIP in exactly the opposite way: each project-related incoming invoice is treated as work-in-progress by default. Work-in-progress adjustment journals to cost of sales are made when these costs are charged to the customer. If AR invoices for costs have already been issued and cost of sales accruals have been generated, the incoming purchase invoices are processed directly through WIP in cost of sales, reversing the previous accruals at the same time.
This second approach tends to be a more scientific way of calculating the company’s profit (or loss) at any given time. Compared to stocks and warehouses, when it comes to materials, it also seems like a much more natural way to account for WIP costs. Where integrated project management, job costing, and accounting systems exist, this may even be an automated procedure that works on a job-by-job basis with the added convenience that incoming AP invoices that relate to more than one job will be correctly assigned to any of the WIPs. o Cost of Sales depending on the status of the respective work. Companies that have opted for the second approach and implemented software solutions to handle it have found that it improves their reporting, from project status to invoice schedule report to profit and loss management report. At any time they can get an analysis of their WIP, cost of sales, and therefore profit without having to go through paper records or spreadsheets for detailed information. Along with improved reporting accuracy, for most of these businesses comes better scheduled workflow and better short- and long-term profitability.