Lesson 2 of 5
Work in process
9 min
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At the end of June, order 1001200 is half built. Components worth tens of thousands of dollars have left the warehouse, hours have been confirmed, but only 200 of 500 alternators are in finished goods. Without WIP, those costs would sit in the income statement as expense while the product is still on the shop floor. Work in process capitalizes them as an asset (unfinished goods) until the order is finished.
WIP at actual cost
In product cost by order, WIP is the difference between the actual costs debited to the order and the credits from goods receipts, as long as the order is not delivered or technically completed. SAP's learning material for product cost by order describes WIP as equal to the actual cost balance in that state. For order 1001200 at the end of June:
| Item | Amount (USD) |
|---|---|
| Components issued (rotors, stators, housings, regulators) | 38,400 |
| Labor confirmed | 9,880 |
| Machine time confirmed | 8,160 |
| Overhead calculated at period-end | 4,760 |
| Total actual costs | 61,200 |
| Goods receipt credit: 200 units × 150 | −30,000 |
| WIP at end of June | 31,200 |
WIP calculation for order 1001200, end of June (illustrative values).
How WIP is configured
WIP calculation uses the results analysis framework, even for production orders. A results analysis key on the order and a results analysis version control the calculation. Costs are grouped by line IDs and posted to results analysis cost elements (category 31) on the order. SAP's material shows results analysis categories such as WIPR (WIP with requirement to capitalize), WIPO (option to capitalize) and WIPP (prohibition to capitalize), so local accounting rules can treat parts of WIP differently. Posting rules then map each results analysis cost element or category to a balance sheet account and a P&L account.
Calculate, then post through settlement
Calculating WIP stores the result on the order in controlling; it does not post to the general ledger by itself. The FI posting happens when the order is settled. SAP's learning material describes the entry: when WIP increases, debit unfinished goods inventory and credit the change in WIP account. For June: debit unfinished goods inventory USD 31,200, credit change in WIP USD 31,200. The income statement now shows the June production cost net of the value still on the shop floor.
- OverheadActual overhead applied to the order
- Calculate WIPActual costs minus goods receipt credits for open orders
- ReviewWIP list by order; check unusually large or negative values
- SettleWIP posted to FI: unfinished goods inventory and change in WIP
WIP cancellation
WIP is temporary. When the order reaches DLV or TECO, the next WIP calculation cancels the WIP carried from the previous period, and settlement posts the reversal: credit unfinished goods inventory, debit change in WIP. At the same time, whatever balance remains on the order becomes a variance. SAP's lesson on co-products notes that when an order has both DLV and TECO, the WIP calculation cancels the WIP from the previous period; the same principle applies to ordinary production orders once they are finished.
- End of JuneWIP createdOrder 1001200 open: WIP 31,200 posted at settlement
- During JulyProduction finishedRemaining 300 units received; status DLV
- End of JulyWIP cancelledWIP calculation returns zero; settlement reverses 31,200
- End of JulyVariance settledRemaining order balance settled as a variance
What would you do?
The July WIP list shows order 0998812, released in January, with WIP of USD 4,300 and no movements since February. What should Priya check first?
- In product cost by order, WIP = actual costs minus goods receipt credits while the order is not DLV or TECO.
- Results analysis key, version, line IDs and posting rules control WIP.
- Calculating WIP does not post to FI; settlement does.
- WIP is cancelled once the order is delivered or technically completed, and the balance becomes a variance.
Check your understanding · not graded
Lesson check
1. Order actual costs are USD 61,200 and goods receipt credits USD 30,000; the order is open. What is WIP?
2. When does WIP reach the general ledger?
3. What happens to WIP when the order is delivered?
4. Which results analysis category means WIP must be capitalized?