By Eric Dreisbach, NADA, Academy Instructor

Officially, work-in-process (WIP) labor is considered an inventory of labor purchased from technicians. Inventories are considered assets and carry a normal debit balance.

The problem is that repair orders are typically posted before the technicians are paid.  For example, when a technician completes his work and the RO is closed, it usually gets posted within a day or two. However, the technician does not get paid until the end of the pay period, a week or two later. This leaves a credit balance in the WIP account* for that time period. Credit balances in inventory accounts are not usually accepted by the manufacturer or by Generally Accepted Accounting Principles.

So, what is the alternative? I suggest posting the credit from the RO directly to a payroll payable account, bypassing the WIP account. The payroll process will then debit payroll payable and clear out the balance. Simple, accurate, and no need for extra posting and gyrations at month end.

But whether you see work in process as an inventory asset or a liability, you MUST have this account on a schedule and control it by the repair order number. Setting up a schedule will require a bit of reconciliation but errors and omissions will show up quickly and will help keep your books tidy.

Agree or disagree? Share your opinion in the comments:

Posted by NADA

National Automobile Dealers Association

8 Comments

  1. Kathy McFarland February 5, 2018 at 2:24 pm

    Totally agree! This has been a frustration of mine for years. I wish the manufacturers would realize this and change the requirement on the financial statement.

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    1. Thank You Kathy. Maybe we can start a movement! Stay tuned for part two where we will take a look at common errors in WIP. A more complete white paper will be available shortly too. Eric

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  2. I seem to recall having this discussion a few times in the past. 😀 I agree that keeping it scheduled(detail forward controlled by RO#) is a good first step. Having a clean account when starting also can minimize headaches when it comes to reconciliation to create the schedule in the first place

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  3. What goes to WIP are the flat rate hours paid to the techs, relieved by the RO’s posted. All other hours go to Adjusted Cost of Labor sales, i.e. a lube tech is guaranteed 40 hours but only does 35 flat rate, the 5 hours go to ACL at time of payroll. We use the Service Tech reports at month to get the total hours/dollars of the days for EOM, post it as a total to WIP, reverse the next month since they will be paid it on the payroll. We are pretty much on the money with the balance in WIP at month end.

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    1. Thank you for your comment Elise. Stay tuned for a follow-up to this post. Keep the comments coming! Eric

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    2. Hanna Patterson April 12, 2018 at 3:50 pm

      Elise,

      This is great information as our unapplied labor is inconsistent with the service reports month over month. Our service director feels it’s because we pay bi-weekly instead of semi-monthly but I feel like that can’t be the issue.

      How does your DMS decide which WIP hours are for Flat rate and which are for Hourly rate techs? Does it automatically differentiate or do you post a manual entry at the end of the month to clear WIP variances?

      Additionally, do you have issues with balances remaining in the WIP account because flagged/paid hours aren’t closed on the RO’s yet?

      Thanks!

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  4. It goes both ways. If the ticket has multiple techs on it – as many do- the tech can be paid before the ticket is closed.

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  5. Thanks for your comments J, My question for you is what usually happens first, the posting of the RO or the payroll to the techs? My experience is that the RO is posted before the payroll, resulting in an amount owed to the techs (liability). This happens regardless of the number of techs on an RO. There are a few exceptions where the tech is pre-paid, (Body Shop, major engine repairs, etc.) but I think this is the exception rather than the rule. Stay tuned for my follow up to this. Thanks and keep the comments coming! Eric

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