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Jobs: Setting a Balance Sheet account for work in progress

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4 Posts
User
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MYOB Account right does not process job costing properly in terms of standard accounting principles as has been described in all accounting text books which means that the profit and loss that is being reported each month may not be correct as it will be distorted by income not necessarily being reported in the period in which the costs have been reported unless journal entries are prepared to adjust for these differences. Profit and loss reports are also distorted by the inclusion of job costs with normal ongoing costs which makes the job of analysing such costs difficulty unless journal entries. p

 

This problem could be solved very easily by setting up revenue and cost of sale accounts for each class of jobs and a work in progress  (balance sheet account) for each job. MYOB would need to have a category set up for each type of cost that a business usually uses for its business such as material purchases, labour, subcontractors , inventory items etc so that the estimates can be entered under these categories rather than using general ledger accounts. Whenever any posting is made to a job, that posting shall be the work in progress account no to that job followed by the category code for that cost. Alternatively that category code could be entered as the account code which would mean that the system would require a job no and post the item to the WIP account for that job. When a job is completed or all jobs have been completed in a period, a program would then be required to be run that would transfer the revenue and costs for such jobs to the Revenue and Cost of sales for that job with the balance being charged to WIP. This program would be able to be rerun so that any errors can be picked up and corrected. The program would also pick up costs and revenue that have been incurred after the actual date of completion which would need to be entered. This approach can also apply to  internal projects and also to import shipments with the difference being than the appropriate GL account would be posted to instead of Revenue and Cost Of sale account.

 

There should be a reporting facility in place that would enable you from either the revenue or cost of sales accounts to drill down to the jobs making up the entry with one line per job showing revenue, Cost of sale, Gross margin and gross margin % ideally in a sort sequence of margin % (the worst margins showing up first) and then an ability to drill down to a selected job so that the user can determine what has happened in the job .

 

A business would now have consistent reporting done within the system itself and users would be able to focus on the business with the profit and loss  report showing the performance on jobs and the costs that are incurred normally by the business.  The actual completion of a job is the only time that the profitability of a job can be properly measured and this is the time when the profit and loss account should clearly show the true gross margin with that important capacity to drill down to jobs to see why the performance did or not meet expectations with a capability for better analysis by the use of standard category codes suited to the business.

 

The system would need to have a capability to bring forward the revenue and cost transaction included in Work in progress an accounting period is rolled over. The changes that MYOB would need to make are not to my mind particularly onerous but the benefit to all users of job costing would be huge as the reporting of profits and losses would be in line with existing standards which apply to small business as much as they do to larger businesses. For those businesses that prefer to use current process, MYOB could always set up the use of the suggested process and the current process as options.  


'Work In Progress"

10 Comments
John_V
1 Post
User

Michael_F makes good points. Systems should be user-friendly and adaptable, to provide the required information readily.

Rhys
Partner
2 Posts
Partner

 Hi Michael,

 

I don’t really agree with this for a couple of reasons. 

 

The vast majority of MYOB users do not use jobs at all, many of those that do are not using them in the way you describe, but as profit centres (for example numerous NFPs use jobs to segment their P&L by grant).  The remaining businesses who do use jobs in this way make up a very small percentage of users.

 

In my view adding in job costing functionality is not as simple an exercise as you suggest.  Almost every business I have ever worked with who runs a job or project costing business has their own way of operating – it is not easy to accommodate all these variations.  This would be a major enhancement.

 

The upshot of that is that MYOB would incur a lot of extra cost to developer this feature.  Who do they turn to in order to recover this cost?  All users?  That hardly seems fair when so few would use it (and there are so many other solutions on the market at the lower prices points).  Just the users who need it?  That would mean this would have to be a new product – AR LiveJobs or some such, at some higher price.

 

Which brings me to the second reason: such a product already exists.  It is called MYOB + Ostendo, or for those who want a solution all in the one app MYOB Exo or MYOB Advanced.  There are a whole range of other solutions besides these (either all in one or an accounting solution with an add on), but this being an MYOB forum I won’t name them.

 

So whilst this may look like an easy benefit to deliver to AR users, I won’t be voting for it.  There are many other features that would benefit a large number of users that I think are more important to develop.

 

I’ll be interested to see what others think.

 

Thanks for kicking this discussion off, cheers, Rhys

JohnLiveware
1 Post
User

'day Michael

 

I agree with what you said. A piece of accounting software must get the accounting right. It is wrong to think wrong accounting does not matter if it is not much used.

 

You have my vote. Too many small businesses try to shoehorn their accounting into what a package offers. This is very dangerous if the business is jobbing and their accounting does not pick up cross bookiings, reflect learning curves and so on. A downturn is likely to prove fatal where good accounting practices and good management could have seen the business survive.

 

Good luck with having the idea implemented.

 

Regards, John.

Clive
Ultimate Partner
3,343 Posts
Ultimate Partner

Hi Michael

 

I am with Rhys on this.  Jobs in MYOB are really just a means of categorisation and are used extensively by the NFP area and others who just use a basic allocation of costs and income.

 

I must declare that I am biased and am a consultant for Ostendo www.ostendo.info which, among many other features, has full job tracking and management capabilities and allows all you are seeking.  There are other job tracking add-ons but I am not aware if they have all the features you seek.

 

Perhaps you could look at developing your own add-on to do what you are seeking and then you can market it.  MYOB are happy to provide you with access to the API to allow you to do this development.  I believe their position is that if you want something outside the basics you should look for an add-on.

 

Regards

Clive Williams

Nalang
5 Posts
User

Clive,

 

The real problem with MYOB is that it is NOT doing the basics in the first place. There is an inventory Module in MYOB where the general ledger settings are a balance sheet account for the asset of inventory and a Sales Account and a Cost of sales when you sell an item out of inventory.

 

Work in progress ia also a form of inventory and the standard accounting entries are to charge Reveue and Costs for a job to work in progress and then on completion of the job, those revenues and costs are transferred to the relevant Sales and Cost of Sales account for that job.  That is the basics as far as Jobs costing is concerned  and these basics are not a recent innovation nor is it my idea. The concept of work in progress as a balance sheet hItem until a job is completed (determined by whatever the copany defines as completion) is entrenched in Australian Accounting Standards as evidenced in the Annual reports of companies like AV Jennings and there is no reason why software provided by MYOBS and others cannot also follow these principle as they do with Inventory. MYOB and others are able to set up their systems to handle inventory and to do the same for Job Costing can't be that difficult. MYOB will need a program to process completed jobs but that can't be that difficult either.

 

The benefits in terms of better job profitability reporting and and more relevant P&L reporting for  busineeses that are jobbers just cannot be measured. I have worked in many businesses who were jobbers and had systems that were supposed to track costs and had management capabilities but had no integity and the reporting out of these systems could not be relied on by management but few people really understood why this was so.

 

It is by adopting sound processes incorporating the basic principles I have outlined that will enable management to have P&L reports that make sense and will make sense to them in inderstanding the finances of the business.  

 

You speak about NFPs and the way theu use job costing. If they work on grants and allocating revenue and costs,of those grants, it is no differnt from a jobbing businees and I am sure that they too would welcome the concepts that I have explained and the better reporting that is going to eventuate once MYOB has embraced the cconcepts of work in progress as an asset and the charging to the P&L on a completion basis  Wikipedia has an article on Job costing and in it there is a criticsm of software companies that appear unable to realize the bebenefis that can come about throuh the use of the computer. I still cannot belive in 2016 that we are having this debate about the mechanics of Job Costing

 

Michael Macleod

Clive
Ultimate Partner
3,343 Posts
Ultimate Partner

Hi Michael

 

You are certainly welcome to your views. 

 

As I intimated in my post, the "Jobs" function is not really a jobs function but is a categorisation function and MYOB are happy to leave it at that.  If you need a full jobs function it is obtainable via 3rd party products, just the same as if you wish to do manufacturing, advanced inventory or any other function that is outside the basics of MYOB.  It is the same with other accounting products - Xero is reallly only comparable with MYOB Essentials and requires a lot of expensive addons to get it to the same functionality of MYOB AccountRight Live 2016.1 or Classic MYOB if you require multi-currency, locations or negative stock.

 

I will not be voting for your proposal but thank you for the invitation to comment.

 

Regards

Clive Williams

helen_s
1 Post
User

We have problems with our existing software where job costing is not done properly and we cannot get proper monthly profit and loss reports showing the job profitability when the job is completed in our P&L without a lot of work by the bookkeoper and we would need to seriously consider changing our software if MYOB was able to process jobs in acoordance with this idea.

 

We have experienced this frustration for many years now and we were hoping that our existing software supplier would enhance their software to have such changes as in this idea . Other companies with whom we deal with and do need to have job costing have experienced similar frustrations.

 

Helen

Jennifer_Kelly
Super Partner
492 Posts
Super Partner

I agree that many MYOB users run Jobs as Cost centres and not as Projects so I would not endorse changing what works for the vast majority of users.

 

If however this discussion is about technical accounting I do think we need to look at the big picture.

 

Revenue Recognition

The general principle of revenue recognition in accounting is to recognise revenue when it is realised or realisable, next is to match the costs as best one can that relate to the revenue being recognised.

 

For many MYOB users who do run "Project" type jobs the jobs usually start and finish in a short time frame so the way MYOB handles it is reasonable.

 

When a job however runs over a longer period be it a month or a year, decisions need to be made as to what if any revenue should be recognised.  What Michael is proposing is to defer all revenue and all costs to the compeltion of the job. This is called the "Completed Contract Method" and while simpler to do is not the prefered accounting method for Longer term contracts.  The more correct method to deal with revenue recognition for these Long term jobs is to recognise revenues and associated costs as a percentage of completion. This gets a lot more complex, requires judgement and is hard to "program".

I note that even Wikipedia comments that :

"There are very few contracting ERP software packages which have the complete integrated module to do this."  

 

In reality what many larger MYOB users do month to month is try to schedule the billings to roughly match the progress of the contract, in doing so they are correct to recoginse this as Revenue along the way. Often costs also roughly match the effort put in and progress of the Job.

If true Percentage of completion accounting is needed then on a month to month basis, or at year end at least, all they need to do is run a Job List report to See by Job Total Revenue - Total Costs = Job Profit and Margin % -  If the Job Profit Margin % is;
- below the forecast overal profit % then either Revenue needs to be accrued or Costs defered into WIP;

- if it is above the forecast overall profit %  then either Revenue needs to be deferred or Costs accrued

 

The total of the accrual or deferal can be booked as one simple summary journal entry that reverses at the start of the next month. It does not need to be be booked job by job.

 

Sure if you run a lot of jobs the MYOB reports may not be sufficient to do the above easily and flexibly. If so then look at the Job Add-ons as mentioned above.

 

Many larger contracting businesses use our Business Intelligence software BI4Cloud to do just that. http://myob.com.au/addons/listing/52/business-intelligence-for-myob/

 

We include a Job report that includes Job Actual, Job Budget, Purchase and Sales Orders yet to Invoice and calculates Forecast Job Profit. This allows them to quikcly and easily determine any WIP or Revenue accruals at month end.  Job reports can also be run over financial years and based on finish date it you want to do the Completed Contract method.

 

Here is an Article suggesting how to use our Job reports to account for Project type jogs - https://support.bi4cloud.com/hc/en-us/articles/212693677-Use-Jobs-to-Manage-Project-Type-Jobs-and-WI...

 

Screen Shot 2016-05-19 at 5.32.03 PM.png  

 

 Jennifer Kelly CA

www.BI4Cloud.com

 

 

 

Nalang
5 Posts
User

I would not have thought that the vast majority of users were using the job costing function as cost centres and quite frankly to do so successfuly would require a lot of discipline on the part of users.

 

If your mode of businees is Projects, jobs, contracts or whatever name you want to use and you have a contract price and incuur many different costs to complete the contract, you will have a point when it is completed and it is up to a business to determine what the criteris is but there will be a date of completion. At that point of completion, that business will measure the profitability of the job. Whether that job lasta a day or a greater period, the principle is the same. It is totally irrelevant the length of time that it takes a job to be completed. You may though, where a job takes a long period use a % of completion method  or possibly break the job up imto measurable stages ie sub jobs but the basivc accounting principles remainthe same.

 

It may well be that few contracting ERP software packages have the ability to process  jobs in the manner that I have desribed in terms of determining Profit but that says more about those other package. Surely, any contracting ERP software package must have some capability to measure profits on jobs. Is  it not a critical function of accounting to meassue profitability and NOT in a way that requires a whole lot of journal entries? We are using computers that once you give them rules, can process data reasonably quickly.

 

I have difficuly in believing that businesses schedule billings so that the accountant can measure the profitability  of the business. If the businees is doing this, then the system is patently wrong and you are doing this because the methodoly used in MYOB is wron, wrong. It is the tail wagging the dog, as simple as that. A business should not be run by the system. The system should be there to support the business.

 

The comments about large users and the use of the % completion methodology have no coherency and there is absolutely no comment on to whether the process of holding revenue and costs in work in progress until a job is completed and then transferring the revenue and costs to Sales/cost of sales accounts at that point is right or wrong.  The text books say it is right and even Wikiperdia agrees

 

The idea is about using the correct accounting principles to process jobs and the production of meaninful profit and loss reports so that management of a business gets the reporting he needs to have and it is also about using a computer. You run a program to process all your completed jobs, run a report or display to check the results, correct errors and run it again,. How simple is that? And you are using the computer to do what it does best. Give it the rules and the results are there in no time. Its called efficiency.

 

In the end this comment becomes a sales pitch for a supposed business intelligence product. As far as I am concerned, MYOB should itself be providing the "business intelligence" about jobs and It won't do it unless its puts the correct accounting principles in place And when it does, it will be able to produce reports and drilldowns that tell a coherent story to management.

 

The programming changes?  With all the competent programmers, they must have, it should be a piece of cake.

 

Michael

Nalang
5 Posts
User

A number of people have stated that job costing is actuallu\y used as cost centres and that setting up job costing as propsed would destroy the ability to use cost centres in this manner. In actual fact this does not have to happen because in the methodology  that has been proposed, The sales/cost of sales accounts occupy the Gross Margin section of the P&L whilst expenses which you may want to allocate  to cost centres occupy the P&L in the expenses section.afyer the Gross Margin

 

When you set up a job number, you determine whether that job number is a cost centre or a job. If a job then the user will determine the Sales, Cost of Sales (but should be predermined as the matching Cost if Sale account for that Sales account) and work in progress account. If it is a cost centre then you do not need any accounts but any account  to which that job/cost centre is allocated to must be an expense or any P& L  account which is not posted to automatically by the inventory module or the proposed job costing methodology. If you wish to post Jobs or inventory to a cost centre then this can be set up by allocating a cost centre when you allocate the GL accounts you will be automatically posting to.  You will then have a capability to have profit centres rather than just cost centres.

 

The important point about the above processes is that there will be integrity in the P&L reporting if a business wants to have Profit/Cost centre reporting , a quality that MYOB at the moment does not necessaily have unless users are extremely diligent. 

 

No doubt I shall have people telling me that this will be extremely costly and this is NOT what MYOB is but I can't see how these ideas can be much of a challenge to a competent programmer to implement. There is also no reason why MYOB shouldn't be using basic accounting principles to make its product more user friendly and do what it purpots to be. Accounting packages need to be producing today's financial information, not what we produced in the past where we did not have the power of the computer to make our job easier, not harder. 

 

Michael