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Don't lose money during your production process! Here's how a work-in-progress account will help

by , 25 December 2014
Is your business constantly in charge of large production projects? Do you often lose track of how much you spend on them?

This could be because there aren't enough controls in place to keep track of how much inventory you use.

The good news is there's a simple way to create a system to monitor your expenses during production so this doesn't happen.

It's called 'Work-In-Progress' control accounts. And today I'm going to show you how to use it to keep track of all your expenses so you allocate project funds correctly and don't lose money...

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Here's how a work-in-progress account will help you control your expenses during production projects

Your work-in-progress account helps you keep a record of all the material, labour and overhead costs from your production process. 
This account keeps track of all these costs in real-time, as they happen.
Here's how it works: You have your inventory stocks, such as raw materials. You need these to carry on the production process. 
The problem comes in when you don't have controls to track how much inventory you take out for production. 
This is where the work-in-progress account comes in. As you take inventory out, you record it as part of your work-in-progress account. 
This way you never take out more inventory than you need or end up buying more inventory stock than you should.
So how do you create a work-in-progress account?
It's easy and it only takes five steps.
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How to set up a good control environment
It's management's responsibility to emphasise the importance of the control system to all the staff members in the business. Management integrity (honesty, ethical standards, etc.) is key. The bottom line is that if management doesn't take internal controls seriously, all efforts will fail.
Use the checklist in chapter I02 of the Practical Accountancy Loose Leaf to ensure you have the right internal control environment in place to protect your business. In particular, you'll learn how to ensure your business has a sound control environment and how to prevent fraud in your Internet banking and your inventory.

Here's how to create a work-in-progress account in just five steps

Step # 1: Determine the total amount of material you use to manufacture the product
Look at your previous production budgets to see what you normally spend on materials. Also check the units of materials you use during production.
Step # 2: Determine how much labour you need
Determine how much labour you'll need to manufacture your product. To do this, determine how many labour hours you need for each unit and times it by your hourly rate. 
Get these figures from your direct labour budget.
Step # 3: Determine your manufacturing overhead costs
Your overhead costs equal indirect material plus the indirect labour expenses you need to operate your business. 
Indirect labour costs are costs you can't directly match with a job, process or operation. Indirect material is the costs of raw material that isn't worth the effort to track per product.
Step # 4:  Transfer direct material, direct labour and manufacturing overhead costs 
Transfer your direct material account, direct labour account and manufacturing overhead account to your work-in-progress account. Then debit it and credit the above mentioned accounts with the amounts you used.
Step # 5: Add the balances together to form the total work-in-progress balance
The work-in-progress balance for this product now represents the figure you will use as part of inventory. 
These five easy steps will help you control how much you use for all your production projects so you don't lose money.
You can find out more about work-in-progress accounts in the Practical Accountancy Loose Leaf Service

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