What Is Work In Progress? (Definition And Example)
By Indeed Editorial Team
Updated 14 September 2022 | Published 13 May 2022
Updated 14 September 2022
Published 13 May 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
A product goes through several stages before it is ready to enter a marketplace. One of these stages is work in progress (WIP). The term work in progress refers to goods in supply chain management that are only partially complete and are undergoing transformations. Understanding what this term means and its implications can help you make accurate financial reporting. In this article, we examine work in progress, list the differences between work in progress and other inventory stages and provide a detailed breakdown of the various stages that inventory goes through before a finished product arrives in a marketplace.
What Is Work In Progress?
The answer to the question, "What is work in progress?" is that it is an inventory that aids human labour, but without reaching a state of task completion or resulting in a final deliverable at present. Companies may measure work in progress using various accounting approaches. Some companies base their overhead on machine hours while others base it on working hours. Investors may identify how a company measures its inventory accounts, before making crucial investment decisions. Work in progress is a component of the inventory assets account on an organisation's balance sheet.
Though the term work in progress refers to all the components and intermediate stages of the manufacturing process, it excludes the cost of raw materials in production stages and the value of the finished product while it rests in inventory. Most organisations strive to eliminate as much work in progress inventory as possible before their reporting period, as estimating the percentage of completion of an inventory asset is time-consuming and complicated. Without a work in progress, most inventory assets usually classify as raw materials or finished goods and are significantly easier to calculate.
Why Is It Important To Minimise Work In Progress inventory items?
While reducing the amount of work in progress units in production is certainly helpful for simplifying accounting procedures, there are several other reasons for companies to do so. Minimising the units of work in progress goods results in reduced clutter in the production area. This reduces the likelihood of accumulation of defective products and also keeps inventory costs low. Additionally, only select lenders may accept work in progress as loan collateral. This happens because in cases where the borrower is unable to pay for their goods, it would be difficult for lenders to sell partially completed inventory items.
How Do Organisations Use Work In Progress?
The three major types of inventory are raw materials, work in progress and finished goods. In a company's balance sheet, it can record work in progress as a separate line item. If the quantity is small enough to be negligible, it may also incorporate all inventory into a single line item. WIP is a type of inventory in accounting and it is a current asset. As the reporting period approaches, companies and accountants try to keep work in progress inventory relatively low, as it is difficult to assign accurate costs to work in progress items.
Organisations use various methods to solve such issues. Some of them include:
Finishing all work in progress inventory items and transferring it to finished goods before closing their books
ssigning a standard, average percentage of completion to all work in progress items. When you average results across many units, the resultant figures may be approximate and because of contingencies like spoilage or wastage, calculations may become inaccurate.
How Do Accountants Calculate The Value Of WIP?
Accountants use a variety of methods to calculate the number of units that are still in the manufacturing process. Accountants commonly use a percentage value of incurred overhead, labour and raw material costs to determine the number of units that are still under progress. The cost of raw materials is usually the first incurred cost because production requires materials before it utilises labour. Organisations typically list the accumulated cost of raw materials in the jobs account ledger. This system is also prevalent in the construction industry where some contracts require percentage completion billing.
This calculation can roughly estimate the amount of work in progress:
Beginning WIP + cost of manufacturing - cost of manufactured goods = resultant WIP
Business managers and analysts carefully analyse a company's work-in-progress inventory to ensure that it properly allocates costs for the manufacturing process to run smoothly. Typically, the percentage of total overhead, labour and material costs that the company incurs can help to compute the number of partial products or work in progress. A construction company, for example, may bill a client based on the project's progress, such as when it is 25% or 50% complete.
What Is The Difference Between Work In Progress And Work In Process?
Work in progress and work in process are terms that professionals may use interchangeably. Though they both refer to goods that are only partially complete in the manufacturing process, the types of partially complete goods that each phrase refers to differ slightly. Products that are complete and transferable to finished goods in a short period constitute work in progress. Professionals in the manufacturing industry commonly use this term.
But work in progress can also refer to unfinished products that may take a long time to complete before becoming transferable to finished goods. You can refer to such components as work in process. Professionals widely use this term in construction or consultancy projects. Companies report both types of inventory on a balance sheet with overhead, raw material and labour costs, despite their minor differences.
What Is The Difference Between Work In Progress And Finished Goods?
The distinction between work in progress and finished goods depends on the inventory's relative completion stage, which in this case refers to saleability. WIP stands for work-in-progress inventory, which began as raw materials and is currently undergoing development or assembly into the final product. The term finished goods refers to the final stage of inventory when product development has reached a point of completion and the product is ready for sale to a customer. The terms work in progress and finished goods denote the intermediate and final stages of the inventory life cycle, respectively.
These terms are both relative and you can use them to refer to components of the inventory of any company. These terms may not be exact descriptions of real-world materials or products. It is common for finished goods of a company to be work in progress goods for another. A lumber mill may find sheet plywood, for example, a finished good because it is ready to sell. This commodity is the raw material for an industrial cabinet manufacturer. The distinction between WIP and finished goods depends on the completion of an inventory item in relation to the total inventory.
How Is Work In Progress Different From Other Stages Of Production?
There are three major types of inventory items and stages of the manufacturing process:
Raw materials: Raw materials are the supplies required for production. Depending on the project and the products you manufacture, these materials may differ.
Work in progress: Work in progress refers to raw materials that are undergoing transformations to create a finished product.
Finished goods: Finished goods have reached the end of the inventory process and you can directly sell them to customers. Finished goods are products that have completed the entirety of the manufacturing process.
The distinction between these three types of inventory items is based on product completion. These are relative terms that may differ depending on the company, project and product in question.
Example Of Work In Progress
As an example of work in progress, you can follow the production process of a company that manufactures combs:
First, the company moves the required raw materials into a storage or production unit. Plastic is the main raw material in this case.
Operating the moulding equipment incurs labour costs.
When the combs are partially completed goods, the company reports all incurred costs up to that point on a balance sheet's work in progress line.
The company transfers the cost to the finished goods line once it finishes manufacturing the combs.
Once it sells the combs, it transfers the incurred costs from inventory to the balance sheet's cost of goods sold (COGS) line.
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