Instead of only materials, suppliers sometimes also provide services for completing manufacturing operations. Companies subcontract operations when there is insufficient manufacturing capacity or when operations require specialized equipment.

Subcontract items are received into WIP, not into inventory. The receipt updates the quantity completed at the designated work order operation.

The work order receipt takes the subcontract from WIP and causes the material cost to change. Subcontract cost calculations are similar to the calculations for materials; they use the same two methods: WAVG and FIFO.