Job WIP Functionality in Business Central (Part 2 of 3)
Updated: Aug 17, 2021
In part 1 of Job WIP Functionality in Business Central we gave you an example of the type of company that would use Job WIP and some background as to what Job WIP is. In part 2 we're going to discuss the 3 major job WIP methods that are standard with out-of-the-box functionality in Business Central. The first WIP method we'll discuss is Completed Contract, the second WIP method will be Percentage of Completion, and the third and final WIP method will be Sales Value.
Completed Contract Job WIP Method
We believe the simplest of the WIP methods is called Completed Contract. For example, Completed Contract does not care what you're billing the customer for this job (you could bill them 25%, 25%, 25%, over 3 months or however long you're working on it ) but we are not going to book any revenue or book any costs to our income statement until we complete the job. So as these costs accumulate we're purchasing materials, applying labor costs to the job, paying for freight, travel, expenses, or engineering and design time, and all these costs are being accumulated in what we call Job WHIP on the balance sheet like an asset with all the revenue that we billed the customer. Once we finish the job the Completed Contract Job WIP method let's you know that it's now time to book all your billings as revenue, book all your costs as cost of goods sold, and do it in the same month so that it's all hitting in the same month. Why should everything be done in the same month?
This should be done on the same month because the alternative is, if you've done it over four months you don't want to see $250,000 in revenue over four months where one month has $250,000 gain but the next month when we consumed all of our materials we lost $100,000. We want all this to sit on the balance sheet and then recognize it at the end of the job. This WIP method makes sure that you're using this process but also that you're matching the associated costs with that revenue in the same period so it avoids wide fluctuations in profitability month to month.
Percentage of Completion Job WIP Method
The Percentage of Completion Job WIP method within Business Central recognizes your revenue on the job proportionately based on the percentage of completion by looking at your total expected costs compared to your total actual costs. For example, we billed the customer $250,000 for a deposit and then we incurred $400,000 in costs (half our total costs) in the first month because we had to purchase materials upfront, pay labor, etc. So, under the Percentage of Completion WIP method it understands that you estimated your total costs at $800,000 but in this month you booked $400,000 (50%) of your costs so, let's book $400,000 as your cost and then let's book a proportionate amount of your expected revenue as revenue, say, $500,000. This means that in this month we are matching our expected revenue, our profit margin of 20% is going to stay 20% every month, and it will be based on the actual percentage of costs that we've incurred compared to our total. In summarization, if our job is a four month job we're going to book zero as cost and revenue for the first three months and in month four we're going to book $1,000,000 in revenue and $800,000 in costs and we'll make $200,000 profit.
Sales Value Job WIP Method
The Sale Value Job WIP method within Business Central allows you to book revenue based on when you bill it, but then also book your expected amount of cost of goods sold in that month so you can effectively "smooth-out" your profitability. For example, we are in month one of a four month project for $1,000,000 in revenue and $800,000 in costs. We bill the customer $250,000 for the deposit and then incurred $400,000 of actual costs. Under the Sales Value WIP method if we've billed $250,000 we want to book revenue of $250,000. The Sales Value WIP method then sees that we've booked the $250,000 in revenue which is 25% of our total revenue so it will only book 25% of our costs as costs of good sold. The Sales Value WIP method is doing an adjustment to book $200,000 in cost and then take the other $200,000 in cost and move it into our job WIP account on our balance sheet.
In part 3 of Job WIP functionality we'll explore whether or not your organization should be using the Jobs, Assembly, or Manufacturing module in Business Central.
Stay tuned!