Hi Community,
Many of our manufacturing clients are ETO shops who are incorporating Project Accounting (or Professional Services) with Manufacturing. Do to the nature of the ETO manufacturing, the client is often required to recognize revenue using the Percentage of Completion method, per their CPAs.
We love that manufacturing and (formally) project accounting are integrated, but from an accounting perspective it feels as though cost accounting for manufacturing and project accounting couldn’t be further apart, and I’m struggling as to the best way to leverage the best of each feature set to achieve the client’s accounting goals.
To illustrate, in manufacturing (and in a full-absorbtion cost accounting paradigm) the costs of each production order are capitalized to WIP Inventory on the balance sheet until the production order is complete. Upon completion the accumulated manufacturing costs are placed in FG Inventory until the goods are “sold” and “shipped” to the customer. Therefore no COGS are recognized until shipment.
Accounting for Long Term Projects requiring percentage of completion accounting, as is typical in construction, all direct costs are expensed immediately thoughout the project. The costs do not go into WIP on the balance sheet, but go directly to the P&L. At the end of each reporting period (i.e., EOM), the Project Managers review the project costs against the budget, determine whether the project is on track to remain on budget, or if the projected costs at completion should be adjusted. After the analysis is completed and the projected costs have been adjusted, most clients would run their WIP report to determine their corresponding “Billings in Excess of Costs” (Liability) and “Costs in Excess of Billings” (Asset) amounts and book an accrual to these accounts to adjust their revenue recognition. (Note - this assumes that all progress billings are booked to revenue, and not customer deposits).
My question to the community to those that are working in this space is, how do you square the circle? On one hand, your executing production orders and accumulting costs there. On the other, you may (or should have) project costs, and progress or milestone billing, that you’re accumulating.
As best as I can tell, Acumatica’s Project WIP report only compares project “Expense” balances to Projected Costs at Completion to measure earned revenue. Given this limitation, how are others configuring the system to put manufacturing costs directly to COGS? Are you mapping WIP to COGS in your Order Types, for example? If so, what challenges do you face upon closing out the production order?
Given the matching principle requirements, it seems that booking manufacturing costs directly to COGS (as opposed to WIP) is correct from an accounting perspective. With that said, it feels like given the accounting mechanics of labor, and overhead absorbtion, along with the transfer of costs from WIP to Inventory, the accounting can get a bit messy and convoluted (just like this post).
I’d be very curious as how partners and other end-users are solving this. My sense is that many are leaving some of the system’s features and functionality on the table, and are using work-arounds, or are calculating revenue outside of the system.
If you’ve made it this far, I would love to connect and get your thoughts on this conundrum.
Tagging
Thanks for your indulgence.
