A WIP-challenged Industry --Dickeson
Our professional accountants know better, but they hang around in order to preserve their precious WIP (Work in Process) construct. The WIP is a part of their General Ledger Accounting routines that borrows BHRs and chargeable hours from Job Cost Accountancy. The assumption is that incomplete jobs should bear some of the period expense cost load that “matches” the future revenue to be generated by those jobs. So we “defer” reporting some expenditures until a future time by the WIP. Logical? Appealing? Seductive?
Well, that’s what WorldCom thought, so they said. “We’ll just defer some of our costs until they match up with the sales revenues those costs will generate.” It’s 2002 and, painfully, we now know better. There’s some “point” beyond which you mustn’t go in any effort to match costs (whatever you define costs to be) against probable revenues. What and where is that point?
Are we manipulating cost deferrals with our WIP systems to the point of misrepresentation? Probably not. But we sure do wind up confusing ourselves and delaying vital statistical needs, don’t we? Our accountants know that BHRs and chargeable hours are myths and metaphors, but they’re dedicated to the notion of matching costs with revenues. Using BHRs and chargeable hours is all they have to work with. And, besides, the IRS is quiet with those fictions.
Now we recognize that wages and social costs of production people are simply expenses to be managed like all other expenses. They’re all expenses of a period of time. Trying to tie the expense of plant labor to specific jobs makes as much sense as trying to tie the water, phone or insurance bills to specific jobs, or shoot billiards with a rope. It isn’t logically justifiable.
Then attempting to export those job costs (whatever you define those costs to be) to general ledger zero balance accounting for WIP valuations by chargeable hours is plain foolish. So why don’t we stop all this baloney and just get as close to cash with our statistical model as we can?