What is 'WIP write off' and how do I go about calculating it?

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Request for Question Clarification by keystroke-ga on 28 Jul 2006 03:36 PDT

I have found the following information for you, if you want me to go
into more depth I don't mind trying to answer this question.

"A work in progress write off relates in the main to the work in progress
brought forward from last year for costs incurred in winning major projects,
that at that time had not been completed or started."

I would suggest that the easiest way to calculate this is to sum all
costs associated with winning business and the costs of current work
that you have not been paid for in full.

Once totalled this is your current WIP write off.

Capital work in progress consists of actual expenditure carried
forward, where it is possible to reliably measure the cost of the
asset/work, and it is probable that future economic benefits will flow
to the department from use or conversion of the asset/work. No
depreciation is applied to capital work in progress, as this asset
category consists of unfinished projects, which have not been
commissioned into service.

--Keystroke-ga

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Request for Question Clarification by keystroke-ga on 28 Jul 2006 03:43 PDT

I have spoken to a friend in accountancy and he has given me the
following information.

"WIP is the amount of time/money that u have accumulated on a job that
is yet to be billed.
You then invoice the WIP and this becomes income.
 
If you invoice less than the WIP, some WIP is written off.
 
eg: WIP$1000, invoice $900 therefore $100 WIP written off"

Does this make sense (I am requesting a clarification).

--Keystroke-ga

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Request for Question Clarification by keystroke-ga on 28 Jul 2006 03:58 PDT

I am sure you know this already but just in case.

Work in progress is the value of your current work (including costs,
hours, profit et al) that has not been paid for by customers in full.
Usually this is due to accounts being issued before the invoice period
has passed.

If you invoice less than the value of the work (doing your first job
as a loss leader to ensure you get future business for example) you
will only receive 90% of the total cost.

In order to prevent your accounts being skewed you mark Work in
Progress Write offs with the amount that is 10 % (in this case) lower
than your invoice total.

You total up all your WIP Write Offs and enter them as a total WIP Write off.

--Keystroke-ga

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Request for Question Clarification by keystroke-ga on 28 Jul 2006 04:15 PDT

"In order to prevent your accounts being skewed you mark Work in
Progress Write offs with the amount that is 10 % (in this case) lower
than your invoice total."

Should read

"In order to prevent your accounts being skewed you mark Work in
Progress Write offs with the amount that is 10 % (in this case) of the
invoice total."

90 + 10 = 100

--Keystroke-ga

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Request for Question Clarification by keystroke-ga on 28 Jul 2006 04:26 PDT

Another update from my friend 

"There are two issues to consider here:
1. Proper business practice
2. Tax and accounting
 
As a business man, u will want to keep track of ur WiP.  If u want to
recover that $100 at a later date u should not write it off, but carry
it forward so it can be taken into account on a later invoice.
 
From a tax point of view, all unbilled WiP at ur year end will be
taxable.  It is therefore important not have WiP that u are not going
to recover.
 
So, if u think u can recover that $100: carry it forward.  If u think
that u will not recover it: write it off."

Hopefully this makes more sense to you than it does to me :)

--Keystroke-ga

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Clarification of Question by chrisbunnett-ga on 28 Jul 2006 05:00 PDT

The issue arises in the Costs column of the piece of software I am
Project Managing into my company: on each screen where a User has to
enter the actual costs incurred for an activity or material usage,
there is a box marked WIP Write Off, which in some cases, is mandatory
(though a zero value is accepted!)...

As I am writing a document to the development company about the User
requirements and further develoments, I thought I should be very clear
as to what it means and how it should work. In all honesty, the
Accounts department here have proved less than stellar in responding
to me, even though ultimately the software is destined to link
directly into the company's Finance package!!

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Request for Question Clarification by keystroke-ga on 28 Jul 2006 05:24 PDT

From what I can understand after talking to my friend who is an
accountant, Work In Progress Write Off is money that you CANNOT
recover from invocies that you are doing as a loss leader.

For example, I am answering this question here, you are willing to pay
me $50 for doing so. I am currently answering this question, it is
thusly a work in progress. If by answering this question I have picked
up $60 dollars in costs my WIP would be $50 and my WIP Write Off would
be $10.

I am answering this question at a loss to myself, nice and cheap to
you, so that in the future you will ask me to answer more questions,
when you do get me to do this I will charge more and make my money
back. In the mean time I am making a loss on the work I am doing yet I
have not invoiced it.

From what I understand, your WIP Write Off is the value of the WIP
that you will not receive back from your invoices.

Does that make sense?

--Keystroke-ga

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Request for Question Clarification by keystroke-ga on 28 Jul 2006 05:33 PDT

Thanks for the confirmation myoarin, I have seen some of your comments
on questions before and I have always been impressed with your level
of knowledge, so you saying that I seem correct means a lot to me
personally.

Am I ok to post as my answer or do you need more information?

--Keystroke-ga

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Clarification of Question by chrisbunnett-ga on 28 Jul 2006 07:02 PDT

I am writing this here as, quite honestly, I cannot comfortably fathom
out how to accept a response as an answer and the information from
'keystroke-ga' have been more than sufficient for me to work with. (I
have read the FAQ page but am no more enlightened!)

I suspect that any further comments would only serve to affirm the
'answer'... When the promised email arrives, I will happily pay for
the time spent on this for me.

Thanks for all your help: I will definitely  use Google Answers again.

Chris Bunnett

I have found the following information for you, if you want me to go
    into more depth I don't mind trying to answer this question.

    "A work in progress write off relates in the main to the work in progress
    brought forward from last year for costs incurred in winning major projects,
    that at that time had not been completed or started."

    I would suggest that the easiest way to calculate this is to sum all
    costs associated with winning business and the costs of current work
    that you have not been paid for in full.

    Once totalled this is your current WIP write off.

    Capital work in progress consists of actual expenditure carried
    forward, where it is possible to reliably measure the cost of the
    asset/work, and it is probable that future economic benefits will flow
    to the department from use or conversion of the asset/work. No
    depreciation is applied to capital work in progress, as this asset
    category consists of unfinished projects, which have not been
    commissioned into service.

    I have spoken to a friend in accountancy and he has given me the
    following information.

    "WIP is the amount of time/money that u have accumulated on a job that
    is yet to be billed.
    You then invoice the WIP and this becomes income.
     
    If you invoice less than the WIP, some WIP is written off.
     
    eg: WIP$1000, invoice $900 therefore $100 WIP written off"

    Does this make sense (I am requesting a clarification).

    I am sure you know this already but just in case.

    Work in progress is the value of your current work (including costs,
    hours, profit et al) that has not been paid for by customers in full.
    Usually this is due to accounts being issued before the invoice period
    has passed.

    If you invoice less than the value of the work (doing your first job
    as a loss leader to ensure you get future business for example) you
    will only receive 90% of the total cost.

    In order to prevent your accounts being skewed you mark Work in
    Progress Write offs with the amount that is 10 % (in this case) lower
    than your invoice total.

    You total up all your WIP Write Offs and enter them as a total WIP Write off.

    "In order to prevent your accounts being skewed you mark Work in
    Progress Write offs with the amount that is 10 % (in this case) lower
    than your invoice total."

    Should read

    "In order to prevent your accounts being skewed you mark Work in
    Progress Write offs with the amount that is 10 % (in this case) of the
    invoice total."

    90 + 10 = 100

    Another update from my friend 

    "There are two issues to consider here:
    1. Proper business practice
    2. Tax and accounting
     
    As a business man, u will want to keep track of ur WiP.  If u want to
    recover that $100 at a later date u should not write it off, but carry
    it forward so it can be taken into account on a later invoice.
     
    From a tax point of view, all unbilled WiP at ur year end will be
    taxable.  It is therefore important not have WiP that u are not going
    to recover.
     
    So, if u think u can recover that $100: carry it forward.  If u think
    that u will not recover it: write it off."

    Hopefully this makes more sense to you than it does to me :)

    From what I can understand after talking to my friend who is an
    accountant, Work In Progress Write Off is money that you CANNOT
    recover from invocies that you are doing as a loss leader.

    For example, I am answering this question here, you are willing to pay
    me $50 for doing so. I am currently answering this question, it is
    thusly a work in progress. If by answering this question I have picked
    up $60 dollars in costs my WIP would be $50 and my WIP Write Off would
    be $10.

    I am answering this question at a loss to myself, nice and cheap to
    you, so that in the future you will ask me to answer more questions,
    when you do get me to do this I will charge more and make my money
    back. In the mean time I am making a loss on the work I am doing yet I
    have not invoiced it.

    From what I understand, your WIP Write Off is the value of the WIP
    that you will not receive back from your invoices.

    Does that make sense?

Many thanks for your kind words,

--Keystroke-ga

I was amazed at how quickly the responses came: the tone was polite
and friendly, not at all condesending. i will use this service in th
efuture.

Keystroke,
It makes sense to me, who has some experience as a bank credit
analyst.  Your multiple clarifications hit all the important points, I
believe, with the one exception:  WIP does not include profits (3rd
clarification), only expenses, actual or accrued.
"costs incurred in winning major projects" (1st posting) may be open
to discussion with a company's auditors.  The same costs related to a
lost project obviously have to be written off  - expensed -  as soon
as it is apparent that the no contract will made, so a very
conservative attitude could be that all such costs are an expense,
regardless if a project ensues  - and a profitable company may prefer
to book all the expenses it can.  A less profitable company might
prefer to included them in WIP, shifting the expense to the following
year(s), when it will have the income from the project.
Similarly, if there are cost overruns in the production, a
conservative attitude could call for taking the expense immediately
with a WIP write-off, while a counter argument could be that the if
the future invoice will cover the additional costs, it is only a
reduction in future income and needn't be written off.

Anyway, just to show my agreement with the answer,
Regards, Myoarin

WIP write-off would be calculated by taking the base amount of work
performed and subtracting the amount actually billed (if you want the
write-off to be a negative number, reverse the numbers).  At least,
that's how law firms do it.  This contrasts with an A/R write-off,
which is done when a client disputes part of the bill, or simply does
not pay and collection attempts end.

HI Chris,
The email notification system has been down for some time, so you
probably won't get an email.
However, Keystroke's having posted an answer in the answer box will
automatically initiate payment.  The answer is still open to requests
for clarification, however.

Glad that you like G-A, and especially that you found Keystroke's
answer to be satisfactory.

Myoarin