Project Manufacturing Cost Recognition

Question

We are implementing project manufacturing and installation in the construction industry for a client.

Manufacturing is for long lead-time items and long manufacturing times.
They purchase a large quantity of raw materials that are specific to the project.
They charge their client for these raw materials at the time of arrival, and it becomes customer-owned at this point on a sales contract.
Potentially a delay between manufacturing completion and installation of the finished goods.

In their current solution:

The cost of the raw material is posted directly to the profit and lost at the time of arrival.
The raw material is broken out into multiple Cost of Sales Accounts by type and is also broken out into multiple Cost Elements for project costing.

When looking at the typical manufacturing process in IFS we facing the following:

The incoming raw material cost is posted to an inventory control account in the balance sheet.
Likewise, finished goods inventory from Shop Orders is also posted to the balance sheet.
The cost of the inventory is only transferred to the profit and loss when issued to the project.
The typical posting controls implemented don’t break out the input costs for finished goods into multiple profit and loss accounts based raw material type and labour inputs to the various shops.
As we are charging the customer for the raw materials prior to the completion of manufacturing, we will end up with large amounts of negative revenue from the revenue recognition process until the manufacturing and installation have been completed.

I expect that this scenario is not uncommon in the construction manufacturing space and am wondering if others have come across the same or similar requirement to be able to be able to expense and dissect raw materials into multiple P&L (and cost elements).

Savinda.Tennakoon · Accepted Answer

IFS supports Project Inventory for cases where materials are purchased specifically for a project and need to be costed immediately rather than held in standard inventory.Key Points:When a purchase order line is linked to a project activity, the material is received into project inventory, not standard inventory.The cost is charged to the project at receipt, so it hits the project cost structure right away.Issuing material from project inventory to the project does not add additional cost, since the cost was already accounted for.This approach avoids large negative revenue during revenue recognition because costs are recognized earlier.Transfers between standard and project inventory are possible if needed.Source: IFS Documentation – About Project InventoryBreaking Down Costs into Multiple P&L AccountsStandard posting controls in manufacturing post finished goods to inventory and only move costs to P&L when issued.To dissect costs by raw material type and labor:Use Cost Breakdown Structure (CBS) for detailed reporting.Configure Posting Control Rules with multiple cost elements mapped to different accounts.Alternatively, leverage Project Cost Elements to classify costs by material type, labor, subcontracting, etc.Reference: IFS Posting Control and Cost ElementsYour Requirements MappedCharge customer for raw materials at arrival → Use Project Inventory and link PO lines to project activities.Expense raw materials immediately → Configure posting so project inventory receipt posts to P&L (instead of balance sheet).Break out costs by type → Use Cost Elements + Posting Control Rules or CBS.Avoid negative revenue during revenue recognition → Early cost recognition via project inventory solves this.

infcraigi · Answer

Thanks Savinda - this appears to be exactly what I’m chasing. (There are some components coming from Standard Inventory also during the manufacturing process).

Breaking Down Costs into Multiple P&L Accounts

Your Requirements Mapped

Breaking Down Costs into Multiple P&L Accounts

Your Requirements Mapped

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