WIP

Symptom
How does the Work in Process (WIP) calculation work, in particular the WIP at targets
method?
Other terms
WIP determination/work in process: KKAX, KKAO, KKAS, KKAV, Periodic
Controlling
Reason and Prerequisites
Design
Solution

General Information

In Cost Object Accounting, work in process is used to valuate unfinished products in a

period. In Product Cost by Period, target costs are used for the valuation of yields that have
been backflushed (although not yet delivered to the warehouse). Normally, Product Cost by
Period should only be used in repetitive manufacturing (see also note 647496). Product Cost
by Order can be used for production orders where the work in process is valuated at actual
costs.

In ERP the production costs such as material consumption and confirmed working
hours are recorded in P&L accounts. To display the value of unfinished products on the
balance sheet accounts, you need to determine the goods value at the end of each month and
transfer this value to a balance sheet account in Financial Accounting by using order
settlement. Work in process will be referred to as WIP in the rest of this document.

Customizing

The results analysis version determines whether its data (saved during order
settlement) is to be transferred to Financial Accounting or not. In Product Cost by Period, it is
highly recommended that you use version 0 to calculate the WIP, and to use this for
settlement to Financial Accounting.

The valuation methods determine how the WIP is calculated and when it is cancelled.
In Product Cost by Period, you can only use target costs for the valuation. WIP should be
cancelled once the finally delivered or technically completed status has been set on the

product cost collector/manufacturing order. The valuation methods have been predefined for
the WIP calculation, and normally do not require adjustment.

The valuation variant for WIP and scrap is used to determine which standard cost
estimate is to be used to calculate target costs. Valuation is not possible if the routing (used
for the yield backflushing) does not match the standard cost estimate (see Calculation of
Work in Process). Therefore, it is recommended that you use Plan costs/preliminary costing
as your valuation strategy, since this is based on the routing for the cost object (product cost
collector, production order etc.).

All cost elements that have been used in the standard cost estimate must be assigned to
row IDs for the WIP calculation, which provide more detail on the costs, e.g. with separate
row IDs for costs from material consumption, internal activity or overhead rates. The cost
element assignment also determines the costs that are to be activated on the balance sheet
accounts in Financial Accounting.

For each row ID, you store the results analysis cost element to be used for posting the
WIP or reserves in CO. For reporting, you can use different cost elements for creation and
consumption if the "separation of creation and consumption" has been activated in the results
analysis version. You need to create the RA cost elements in their own special cost element
category. This keeps them separate from the real costs on the orders.

To update WIP in Financial Accounting, you need to maintain posting rules that
specify the balance sheet account to be used for displaying the WIP, and the P&L account to
be used for the offsetting entry.

Calculation of Work in Process

In Product Cost by Period, the WIP quantities are valuated using target costs. In
repetitive manufacturing, backflushing must be done using reporting points, so that WIP can
be calculated using target costs. Selected operations are defined as reporting points especially
for this purpose. Reporting point backflushing automatically includes all the operations
between the corresponding reporting point operation and the previous one. Backflushed
quantities that have not yet been delivered to the warehouse and are not scrap are valuated
according to the valuation variants for WIP and scrap in Customizing.

WIP = Sum(i = l to n) Plan costs operation(i)

* WIP reference qty. operation(i)

/ lot size

with n = number of operations

i = current operation
l = operation increment

WIP reference qty. operation(i)

= Backflushed yield operation(i)
- Sum(j = 1 to n) Backflushed scrap operation(j)
- Goods receipt qty.

with j = current operation(i) + l

Note that the planned costs used in the WIP formula are reduced by assembly scrap.

The reference quantities for the WIP calculation are determined by the corresponding
product cost collector/manufacturing order, whereas the valuation uses the costs from the
relevant costing. If the costing is for material then it needs to be saved with an itemization.

Only the costing values that can be assigned to an operation are relevant for the WIP
calculation. Template costs which are not assigned to an operation are assigned to the first
operation for the WIP calculation. All other cost items are not taken into account for the WIP
calculation.

You can only valuate WIP if the routing (used for backflushing) matches the routing of
the standard cost estimate used for calculating the target costs. If this routing does not match,
then you cannot assign the corresponding costs according to the operation. This in turn means
that WIP cannot be calculated using target costs. For further details refer to note 386816.

Example:

Costing:
Operation
0010
0020

Planned Costs
10
20

Lotsize 1

Product cost collector operation 0010:

a. Yield = 3
b. Scrap = 0
c. WIP ref. quantity = 1 (a. - f. - g.)
d. WIP = 10 (c. * planned costs of operation 0010)
Product cost collector operation 0020:
e. Yield = 2
f. Goods receipt = 1
g. Scrap = 1
h. WIP ref. quantity = 1 (e. - f.)
i. WIP = 20 (h. * planned costs of operation 0020)
j. WIP total 30 (d. + i.)

Settlement of Work in Process

To display the calculated WIP, you need to transfer it to FI using order settlement.

The following is a list of requirements for the settlement of WIP to FI:

o You need to store a results analysis key in the master data for the product cost
collector/manufacturing order.
o WIP must be calculated.
o The results analysis version must be relevant for settlement and the transfer to
FI must be activated.
o You need to create accounts for the results analysis categories to be settled to
FI.