Reserves and Work in process (WIP) in SAP PS

Work in process (WIP) inventory forms a part of the working capital or current assets of a firm appearing in their balance sheet. Work in process or progress  are  partially completed goods, parts, or subassemblies that are no longer part of the raw materials inventory and not yet part of the finished products inventory.   

Work in process is the difference between the debit and credit of an order that has not been fully delivered. You can calculate WIP at actual costs for the following objects:

• Production orders
• Process orders

This method determines the work in process for each production order by calculating the difference between the actual costs incurred and the actual costs settled (that is, the difference between the debits for goods issues, internal activity allocations, external activities, and overhead on the one hand, and the credits for goods receipts on the other). Once the last part of the order lot has been delivered to stock, any remaining work in process must be canceled so that the order costs can properly be settled to stock.

Reserves are maintained for unrealized costs. When the system calculates the WIP, it may create reserves for unrealized costs for certain orders. This happens when the actual cost incurred to date for the manufacturing order is less than the credit posting at the time of the goods receipt. The system creates these reserves because higher costs than the actual costs to date are expected on the basis of the information in the standard cost estimate for the material that was used for material valuation. When you settle, reserves for unrealized costs usually result in the system debiting the expense account (from reserves) in the income statement and crediting the reserves for unrealized costs in the balance sheet.

For e.g: You have incurred costs for 45 units worth (Rawmaterial activity hours etc), but have an output of 50 quantity of finished product

so you have to maintain a reserve for unrealized costs i.e  the costs that you would incur for the extra 5 quantity
 
For e.g: 50 quantity costs should be 50000 $
           But you have inured only 45 ie 45000$ only
           So the unrealized costs of 5000 has to be maintained in reserve
 
In simple words, if credit side of production order ( goods receipt value) is more than the debit side ( goods issue+activity cost), system will post WIP reserve account.