Subcontract costs are entered in the routing at the subcontract step or operation. The cost is entered as the standard charge per unit from your subcontract supplier for performing the work. You can have multiple subcontract operations in a routing.

Actual management of subcontract processing requires that the work order be linked to a subcontract purchase order (PO) if you want to have charges applied to specific work orders. When the PO is received, the Inventory accounts are not affected. Instead, the standard subcontract cost is debited to Work in Process (WIP), and the PO amount is credited to PO Receipts. Any variance between the standard subcontract cost and the PO amount is calculated as a subcontract variance and posted accordingly.

If you open a subcontract PO and do not link it to a specific work order, then the subcontract cost is debited to Cost of Production instead of WIP.