Work in Progress (WIP) or Work in
process is inventory that has begun the manufacturing process and not included
in raw materials inventory as it is not a complete product. Work in progress on
a balance sheet work is shown as an asset as money has been spent towards a
completed product. The product has not been completed so far hence the WIP is
valued lower.
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| Source: dynamicsuser.net |
The formula for WIP is:
Work in process = (operating
inventory goods in process + raw materials used during the period + direct
labor during the period + factory overhead for period) - ending inventory.
Example of WIP:
Let us take a company ABC which
manufacturers’ widgets. Considering that it takes two weeks to make a widget.
By the end of the month on the last day when the company closes its account, it
is observed that there are only 10000 widgets in its inventory. There are only
3000 partially completed widgets. Then on the left hand side of the balance
sheet this 3000 partially completed widgets are recorded as work in progress
and are considered as an assets to the company.
Thus a manufacturing firm incurs
costs as it transforms materials into work in process and later to finished
product. During the manufacturing process the manufacturing firm consumes raw
materials, labor and factory overhead costs in order to create both partially
completed and fully completed units of inventory. Cost of manufacturing is
considered in raw materials account, the work in progress account. This is also
known as work in process or finished products account. To the inventory
accounts the inventory costs are debited till the manufacturing process is
completed or the inventory is sold completely.
1. To determine the cost of beginning
work in progress for the accounting period. During a production process the
work in process refers to raw materials inventory that has been only partially
converted into finished product. The work in process inventory undergoes
additional processing so as to convert into finished products.
2. Costs of the raw inventory costs are
calculate for the accounting period. At the beginning of the accounting period
the cost of raw materials inventory is added to the cost of purchased materials
for the period to determine the total cost of raw material inventory. Deduct
the cost of raw material from this figure that is on hand at the end of the
accounting period to determine the costs of materials consumed during the
accounting period.
3. The labor costs for the accounting
period should be calculated.
4. The factory overhead costs can be
calculated for the accounting period. This includes the calculation like rent,
depreciation costs, taxes and insurance.
5. During the accounting period the
manufacturing cost is calculated. The raw material inventory costs, labor costs
and factory overhead costs are added together and then calculation is done.
6. For the accounting period the cost of
ending work in process is calculated. To the manufacturing costs is added to
the beginning of work in process.
7. Using this formula rework and scrap
or accounting errors may impact the validity of the ending work in progress.
Thus a physical work in progress inventory can be performed in an effort to
obtain a more accurate ending work in progress.
Work in progress can be stated as the
concept used to describe the flow of manufacturing costs from one area of
production to the next and the balance in WIP denotes all production costs
incurred for partially completed goods. Materials and labor costs is included
in production costs and is used in making goods as well as allocated overhead.
Along with other inventory accounts WIP is the determined by various accounting
methods across different companies. Thus investors should recognize how a
company is measuring the WIP and other inventory accounts. Work in progress of
two companies may not be the same and comparable. It depends on the allocations
of overhead on man-hours or machine-hours.
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