What is Work-in-Progress (WIP)
Work-in-progress (WIP) is a production and supply-chain management term describing partially finished goods awaiting completion. WIP refers to the raw materials, labor and overhead costs incurred for products that are at various stages of the production process. WIP is a component of the inventory asset account on the balance sheet. These costs are subsequently transferred to the finished goods account and eventually to cost of sales.
Work In Progress (WIP)
BREAKING DOWN Work-in-Progress (WIP)
WIP is a concept used to describe the flow of manufacturing costs from one area of production to the next, and the balance in WIP represents all production costs incurred for partially completed goods. Production costs include raw materials, labor used in making goods, and allocated overhead.
The Differences Between Job Costing and Process Costing
For accounting purposes, process costing differs from job costing, which is a method used when each customer job is different. Job costing tracks the costs (e.g., cost of materials, labor, and overhead) and profits for a specific job, and it allows accountants to trace expenses for each job for tax purposes and for analysis (scrutinizing costs to see how they can be reduced). For example, XYZ Roofing Company provides their residential clients' bids for roof repair or replacement; each roof is a different size and will require specific roofing equipment and a varying number of labor hours. Each bid lists the labor, material, and overhead costs for the work.
On the other hand, a process costing system tracks, accumulates and assigns costs associated with the manufacturing of homogenous products. Consider a company that manufactures plastic combs. The plastic is put into a mold in the molding department and is then painted before being packaged. As the combs move from one department (molding to painting to packaging) to another, more costs are added to production.
How Costs Are Assigned to WIP
When the combs are manufactured, plastic is moved into production as a raw material; then labor costs are incurred to operate molding equipment. Since the combs are only partially completed, all costs are posted to WIP. When the combs are completed, the costs are moved from WIP to finished goods, with both accounts being part of the inventory account. Costs are moved from "Inventory" to "Cost of Goods Sold (COGS)" when the combs are eventually sold.
Factoring in Units of Production
Accountants use several methods to determine the number of partially completed units in WIP. In most cases, accountants consider the percentage of total raw material, labor and overhead costs that have been incurred to determine the number of partially completed units in WIP. The cost for raw materials is the first cost incurred in this process because materials are required before any labor costs can be incurred.
Implications for Investing
WIP, along with other inventory accounts, can be determined by various accounting methods across different companies. Thus, it is important for investors to discern how a company is measuring its WIP and other inventory accounts. One company's WIP may not be comparable to another. Allocations of overhead can be based on man hours or machine hours, for example.