2 min read
Work in progress may seem like a pretty self-explanatory phrase that you might have come across in your daily life, but it has application in accountancy, too. Find out more about the meaning of work in progress with our simple guide.
Work in progress meaning
Work in progress (WIP) is used to refer to an inventory account that’s holding goods which are in production, but not yet completed. Labour, material, and other overheads are all considered work in progress, meaning they are incurred over the production process, or, as the name states, while a product is a work in progress.
Work in progress accounting is different to job costing, as it is applied to a standard production process where all products are the same, and the production line has a fairly constant set of materials and labour. Job costing is used on a project by project basis where each project is different.
Work in progress accounting management
In terms of accounting, a work in progress account appears on the balance sheet as a current asset. Work in progress entries cannot be valued the same as a final product, as they aren’t finished. When the products are finished, they can be entered as inventory, and when they are sold, they can be classified under cost of goods sold (COGS). WIP is usually calculated at the end of the accounting cycle and may also be referred to as “in-process inventory.”
WIP costs are often minimised as it would be too difficult and time consuming to find the exact percentage of completion and the associated costs. The way work in progress accounting is carried out can also differ from company to company depending. Labour hours, for example, may be based on human work hours, or they could be based on machine hours.
In some cases, companies will aim to complete all WIP in time for the closing of the books, so that there is no WIP to account for, only inventory. Other companies may use the Just-In-Time (JIT) form of inventory management, which requires a strong and trustworthy relationship with local suppliers. Under this model, companies receive materials only when they need them, make the product, and ship it – therefore requiring no long-term inventory. This can cut down work in progress costs, but it’s a risky move, especially if companies using JIT run out of buffer stock.
Work in progress formula
While it’s extremely hard to find a precise figure for work in progress assets, an estimate can be made for ending work in progress:
The final figure should not be considered completely accurate, as it does not account for defective items or spoilage.
Work in progress vs. work in process
These two terms are very similar and can generally be used interchangeably. More specifically, work in process can refer to items that are completed very quickly, such as manufactured goods that don’t necessarily need to go through multiple stages of progress, but simply need to be processed. Work in progress can be used to describe products that take longer to complete.
The precise terms used to describe a company’s inventory will vary from brand to brand. For example, a plank of wood may be a finished product for a hardware store and be considered inventory, but that same plank will be considered raw materials to the builders who use it to help build an extension. In this way, you can’t make any assumptions about what counts as a finished good and what counts as a work in progress item without taking an in-depth look at the company itself.
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