Work-in-Progress (WIP): Its Definition With Examples

Work in progress (WIP)
Work in progress (WIP)

What Is a Work-in-Progress (WIP)?

In production and supply chain management, work-in-progress (WIP) refers to partially finished goods that are awaiting completion. WIP refers to the raw materials, labor, and overhead costs experienced by items at various stages of the manufacturing process. WIP is part of the inventory asset account on the balance sheet. These costs are then moved to the finished goods account, and finally to the cost of sales.

WIPs are one of the components on a company’s balance sheet. The WIP figure only includes the value of products in intermediate manufacturing stages. This ignores the value of raw materials that have not yet been incorporated into a product for sale. The WIP figure also excludes the value of finished products stored as inventory for future sales.

NOTE

  • Work-in-progress (WIP) refers to the cost of unfinished goods in the manufacturing process, which includes labor, raw materials, and overhead.
  • On the balance sheet, work in progress (WIPs) are classified as current assets.
  • Minimizing WIP inventory before reporting it is both common and important because estimating the percentage of completion for an inventory asset is challenging.
  • A work in progress (WIP) is not the same as a finished product, which is a product that is ready for sale to the consumer.

WIP is a term used to explain the flow of manufacturing expenses from one area of production to the next, with the balance representing total production costs incurred for partially produced goods. Production expenses include raw supplies, labor, and allocated overhead.

When combs are created, plastic is used as a raw material. Then, labor costs are incurred when operating molding equipment. Because the combs are only partially constructed, all expenditures are recorded as WIP. When the combs are done, the expenses are transferred from WIP to finished items, and both accounts become part of the inventory account. When the combs are sold, the costs are transferred from inventory to the cost of goods sold (COGS).

When inventory is mixed with human labor but has not yet reached final goods status, it is classified as a work in progress (WIP). It has only been used for some of the essential labor, not all of it. WIP, like other inventory accounts, can be determined using a variety of accounting methodologies across firms.

As a result, investors must understand how a company measures its work-in-process and other inventory accounts. One company’s work in progress (WIP) may not be comparable to another. Overhead allocations can be based on labor or machine hours, for example. WIP is also considered an asset on the balance sheet. It is common practice to reduce the amount of work in progress inventory before reporting is required because estimating the percentage of completion for an inventory asset is complex and time-consuming.

Work in progress can also be referred to as in-process inventory.

Consider the following. 

Accountants utilize a variety of approaches to calculate the number of partially completed units in WIP. In most circumstances, accountants use the percentage of total raw material, labor, and overhead costs incurred to calculate the number of partially completed units in WIP. The initial cost incurred in this process is the cost of raw materials, which must be obtained before any labor costs can be incurred.

For accounting purposes, process costing is distinct from task costing, which is utilized when each customer’s job is unique. Job costing keeps track of a job’s costs (e.g., materials, labor, and overhead) and profits, allowing accountants to trace spending for each project for tax purposes and analysis. 

For example, imagine XYZ Roofing Company offers bids on roof repair or replacement to its residential consumers. Each roof is unique in size, necessitating different roofing equipment and labor hours. Each bid includes labor, material, and overhead costs for the work.

A process costing system, on the other hand, monitors and allocates expenses connected with the production of homogeneous products. Consider a company that makes plastic combs. The plastic is poured into a mold in the molding section and painted before being packed. As the combs go from one area to another (molding, painting, and packaging), production expenses increase.

Raw material costs are recorded as a current asset on the balance sheet, albeit they are commonly combined into a single line item that includes WIP and finished goods inventory.

Work-in-Progress versus Work-in-Process.

Work-in-process refers to partially completed goods. These commodities are also known as goods-in-process. For others, work-in-process refers to products that go from raw ingredients to final products in a short amount of time. Manufactured items are an example of a work-in-process item.

As previously stated, the term “work-in-progress” can apply to assets that take a long time to complete, such as consultancy or construction projects. This distinction may not be the norm, therefore either phrase can be used to refer to unfinished products in most cases. 

This inventory appears on a manufacturing company’s balance sheet. This inventory account, like work-in-progress, may contain direct labor, material, and manufacturing costs.

Works-in-Progress versus Finished Goods

The distinction between work in progress (WIP) and finished goods is determined by the inventory’s relative completion state, which in this case represents saleability. WIP refers to the intermediate stage of inventory in which inventory has begun as raw materials and is now being developed or assembled into a finished product. Finished products are the final stage of inventory, in which the product has reached a point of completion and the next stage is the sale to a consumer.

Work-in-progress and finished goods are comparable phrases used to describe how a certain company accounts for its inventory. They do not provide absolute definitions of actual materials or things. It is wrong to presume that finished items for one company are the same as finished goods for another. For example, sheet plywood may be a finished good for a lumber mill because it is ready for sale, but it is considered raw material for an industrial cabinet builder.

As a result, the distinction between work in progress (WIP) and finished items is determined by an inventory’s level of completion in relation to total inventory. WIP and finished items represent the intermediate and end stages of an inventory life cycle, respectively.

What Does “Work in Progress” Mean in Accounting?

In supply chain management, work-in-progress (WIP) refers to partially completed commodities. They may also be known as in-process inventory. This includes everything from administrative expenditures to raw materials that join together to generate the end product at a specific point in the manufacturing cycle. In accounting, work in progress (WIP) is considered a current asset and is classified as inventory.

Is Work in Progress a Type of Inventory?

When raw material and human labor come together, a piece of inventory is designated as work-in-progress. When a product is completed, it is moved from work in progress to finished product status. Finally, when the product is sold, the balance sheet shows the cost of goods sold (COGS) rather than the inventor.

How is Work-in-Progress calculated?

Accounting calculates work-in-progress inventory in a variety of ways. Typically, partially completed products in WIP are calculated as a percentage of the company’s total overhead, labor, and material expenditures. A construction company, for example, may bill a corporation according on the project’s stage of completion, such as 25% or 50%, and so on.

Conclusion

A work-in-progress on a company’s balance sheet denotes the labor, raw materials, and overhead costs of unfinished goods. Unfinished goods are those that are still in the manufacturing process and are not ready for sale to customers. They are considered current assets. Companies frequently aim to limit what is described as unfinished because it is difficult to calculate the percentage of completion for works in progress. 

Work-in-progress is frequently used interchangeably with work-in-process, but it usually refers to longer-term projects, such as building. Work-in-process usually refers to things that are manufactured swiftly.