Work in progress definition
/What is Work in Progress?
Work in progress (WIP) refers to partially-completed goods that are still in the production process. These items may currently be undergoing transformation in the production process, or they may be waiting in queue in front of a production workstation. Work in progress items do not include raw materials or finished goods. Work in progress is usually comprised of the full amount of raw materials required for a product, since that is added at the beginning of production, plus the cost of additional processing as each unit progresses through the various manufacturing steps.
WIP is one of the three types of inventory, of which the others are raw materials and finished goods.
Presentation of Work in Progress
Work in progress may be reported on the balance sheet as a separate line item, but is usually so small in comparison to the other types of inventory that it is aggregated with the other inventory types into a single inventory line item.
Related AccountingTools Courses
Accounting for Work in Progress
Work in progress is typically measured at the end of an accounting period, in order to assign a valuation to the amount of inventory that is on the production floor. It is extremely difficult to assign an accurate cost to a WIP item, since there may be many WIP items in various stages of completion as of period-end. To make the accounting process easier, some companies complete all WIP items and transfer them into finished goods inventory prior to closing the books, so that there is no WIP to account for. An alternative is to assign a standard percentage of completion to all WIP items, on the theory that an average level of completion will be approximately correct when averaged over a large number of units.
Work in Progress Reduction
From a production theory perspective, there has been an increasing emphasis on reducing the amount of WIP units in the production process at any one time. By reducing WIP, there is less clutter in the production area and less chance of having defective products build up before being discovered, while the total investment in inventory can be kept as low as possible. Minimal WIP investment is a cornerstone of the just-in-time system of manufacturing.
An argument in favor of maintaining some work in progress is that an inventory buffer is needed in front of any constrained workstations in the production area, to ensure an even flow of goods. If this inventory were to be stripped away, then the bottleneck operation being protected by it would sometimes run out of work due to problems upstream of it, resulting in a reduced level of throughput for the organization as a whole, and therefore less profit.
How to Calculate Ending Work in Progress
It is possible to estimate the amount of ending work in progress, though the result can be inaccurate, due to variations caused by actual scrap levels, rework, and spoilage. The calculation of ending work in progress is:
Beginning WIP + Manufacturing costs - Cost of goods manufactured = Ending work in progress
Another approach is to estimate the percentage of completion for each item in work in progress inventory (which can be a highly qualitative judgment), and then apply a cost to it. This cost typically includes the entire raw material cost (since that is added at the beginning of the work process), with labor and overhead added based on the percentage of completion. The percentage of completion may be based on the number of work stations that have processed an item to date, for which a labor cost can be compiled.
Work in Progress as Collateral
From a borrowing perspective, few lenders will allow WIP to be used as collateral for loans, since partially-completed inventory would be difficult for them to sell in the event of a borrower default, unless it is very close to completion.
Terms Similar to Work in Progress
Work in progress is also known as work in process.
Related Articles
Ending Work in Process Formula