What is the significance of WIP?
Term WIP is normally associated with production. During production process input (ram material cost, processing cost, overhead cost) is consumed and at the end of production finished product is expected. But what if production is not yet completed or production is in process, and then unfinished product is referred as WIP.
WIP is something more thing more than raw material but less than finished product. WIP is in the process of getting converted into finished goods. Once converted into finished goods, it will be sold thereby generating revenue to the company. Hence it’s important for companies to keep close track of wip.
Moreover, it’s legal requirement by income tax department that companies need to report wip in their financial statement. When preparing financial statement (balance sheet and P&L) at the month end, then wip is also calculated and reported in financial statement. Hence calculating wip and updating in financial statement is month end process.
High WIP signifies:
- Company is having lot of production going on. May be company received lot of customer orders which are to be fulfilled. Company might be expecting strong order pipeline.
- May be company’s production process is a bit slow. May be its taking longer time to convert raw material into finished goods.
Low WIP signifies:
- Not much production is going on. May be company is expecting not much orders from customers.
- May be company is having lean production (just in time production).
WIP calculation and treatment in account books.
Let’s assume production is going on and below is consumed in production process.
Here WIP = Input cost consumed – value of output produced.
At month end, wip needs to be updated in account books. Hence below accounting entry should be generated.
Once production is completed, then any difference between input consumption cost and produced output value will not be referred as WIP rather it be called as production variance.
After production is completed, WIP should become zero and difference will be called production variance. Below document will be posted.
Let’s understand configuration needed for WIP in sap
In SAP, production order is created for production department to work upon. Production order is used to track all the activities of production department.
Production order keeps track of
- Raw materials are consumed in production and their financial value.
- Process/ activities performed in production process and its financial value.
- Estimated overhead cost consumed in production process.
- Quantity of output produced and its financial value.
Hence, we have all the information needed to calculate wip for the production order. Once we have required configuration in sap then at month end we can calculate and post financial document using some T codes.
Let’s understand wip for below production order.
Above production order can be represented as below:
SAP requires below inputs to be able to handle wip:
# Which cost should be included in WIP calculation?
For example, If I decide that all cost to be included in WIP calculaiton then
WIP = 80+1.6+0+40=121.6
If I decide that overhead cost should not be a part of WIP calculation.
Then WIP = 80+1.6+0=81.6
# What % of cost should be included in WIP calculation?
If I decide that 0nly 40% of overhead cost should be included in WIP calcuation
Then WIP = 80 + 1.6+0+(40% of 40) = 80+1.6+0+16 = 97.6
# GL account determination for posting WIP document?
After WIP amount calculation, below financial document needs to be posted.
Hence GL account needs to be maintained for WIP a/c (balance sheet account) and Change in WIP a/c (profit & loss account).
# Production order goes through various stages. At what stage of production order, WIP should be calculatd and posted?
Entire configuration of WIP in sap is basically to answer above four questions.
Hope this is helpful in understanding configuration needed for handling WIP in sap.
Thank you!
GL ACCOUNTING
- What is SAP FICO ?What business requirement is fulfilled in this module?
- What is enterprise structure in sap fico?
- What is GL account? What is account group? What is operational chart of accounts?
- What is the need of country chart of account or alternate chart of account? How country chart of account helps fulfill a business requirement?
- What is the need for group chart of account? How group chart of account helps in consolidation of financial data?
- What is non leading ledger in sap fico?
- What is company code global settings? What global parameter is assigned to company code?
- What is fiscal year variant? Why fiscal year variant is assigned to company code?
- What is posting period variant? Why posting period variant is assigned to company code?
- What is field status variant? What is field status group?
- What is document type in sap? Explain the purpose of document type?
- Document date vs Posting date vs Entry date vs Translation date. Explain
- What is posting key? what is the use of posting key?
- Document header & line items capture information of business transaction.
- Everything about currency & exchange rate in sap.
- Foreign currency valuation in sap. Explain with example
- Retained earnings account helps in year end balance carry forward. Explain
- What is the significance of tolerance groups in sap?
- What parameters are maintained in GL master and how does it impact in document posting?
ACCOUNTS PAYABLE
- What is meant by accounts payable in sap?
- Understanding procure to pay (PTP) cycle and accounting document at each step.
- Understanding MM FI integration in very simple terms.
- Purchase order price determination in SAP. Explained in very simple words.
- House bank, Bank key, Account ID in SAP
- What configuration (FBZP) needed for executing F110 in sap ?
ACCOUNTS RECEIVABLE
- How sap overcomes challenges in accounts receivable process?
- What is customer reconciliation account?
- Understanding order to cash cycle in sap.
- Understanding SD FI integration in very simple terms.
- What is lock box? How lockbox helps in collection from customers?
TAX ACCOUNTING
- How sap helps in tax accounting?
- Tax configuration in sap: Tax procedure, Tax code & Tax jurisdiction code
- Concept of tax jurisdiction code & tax jurisdiction structure
- Significance of “Tax category & Posting without tax allowed” in GL master.
- Tax base amount and Discount base amount
- Assigning tax code V0 & A0 for non taxable transaction?
- Deductible input tax vs non deductible input tax
WITHHOLDING TAX
- Withholding tax in sap explained with example.
- How sap overcomes challenges in managing withholding tax?
- Withholding at the time of invoice or payment
- Withholding tax configuration in sap
- Business place & Section code in sap
- Withholding tax certificate numbering in sap
- Withholding tax report for filling tax returns
ASSET ACCOUNTING
- How sap helps in asset accounting?
- What is meant by asset accounting?
- What is the use of asset class?
- What is the use of depreciation key in asset accounting?
- Depreciation area and Chart of depreciation in sap.
- Derived depreciation area VS real depreciation area?
- Understanding asset accounting configuration needed in sap
- GL account determination for posting asset transaction
- Asset transaction and corresponding accounting document?
- How depreciation is posted in sap?
SAP CONTROLLING