Loading the player...

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.

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.

RELATED TERMS
  1. Full Costing

    The full costing technique is a managerial accounting method ...
  2. Cost Accounting

    Cost accounting is an accounting method that aims to capture ...
  3. Cost of Labor

    The cost of labor is the total of all employee wages plus the ...
  4. Flow Of Costs

    Flow of costs refers to the manner or path in which costs move ...
  5. Unit Cost

    Unit cost is the cost incurred by a company to produce, store ...
  6. Manufacturing

    Manufacturing is the processing of raw materials into finished ...
Related Articles
  1. Investing

    How to Analyze a Company's Inventory

    Discover how to analyze a company's inventory by understanding different types of inventory and doing a quantitative and qualitative assessment of inventory.
  2. Investing

    Analyzing Operating Margins

    Learn how to analyze operating margins and how to put this aspect of equity analysis to work.
  3. Investing

    Accounting For Differences in Oil and Gas Accounting

    How a company accounts for its expenses affects how its net income and cash flow numbers are reported.
  4. Investing

    Spotting Creative Accounting on the Balance Sheet

    Companies have used creative accounting as a way of manipulating their balance sheets.
  5. Financial Advisor

    The Top 5 Materials ETFs for 2016

    Read about five of the best materials exchange-traded funds available for 2016, and learn how you can get the exposure you need in this sector.
  6. Investing

    The Importance Of Analyzing Accounts Receivable

    While investors often focus on revenues, net income, and earnings per share, they should not overlook the importance of analyzing accounts receivable.
  7. Investing

    How Working Capital Works

    A firm's handling of working capital reflects its efficiency, financial strength and cash flow.
  8. Personal Finance

    Career advice: financial analyst versus accountant

    Read an in-depth comparison between a career as a financial analyst and a career as an accountant, including how to determine which is best for you.
  9. Investing

    The Debt Report: The Materials Sector

    Find out why the U.S. materials sector has accumulated more and more debt each year between 2011 and 2015, outstripping valuation gains.
RELATED FAQS
  1. What is the difference between work in progress (WIP) and finished goods in accounting?

    Learn about the key features and differences between work in progress (WIP) and finished goods in terms of financial accounting ... Read Answer >>
  2. What are some examples of overhead treatment in cost accounting?

    Look at a brief example of how cost accounting treats overhead expenses, how those expenses are different from direct labor, ... Read Answer >>
  3. How is work in progress (WIP) typically measured in accounting?

    Understand what work in progress is and why a company would have this on its financials. Learn how work in progress is typically ... Read Answer >>
  4. What is the difference between prime cost and conversion cost?

    Understand the difference between prime costs and conversion costs, and learn how each type is used in analyzing business ... Read Answer >>
  5. On which financial statement does a company list its raw material costs?

    Discover what items are raw materials, how raw material costs affect businesses, and where these costs are recorded on a ... Read Answer >>
  6. How are cost of goods sold and cost of sales different?

    Cost of goods sold and cost of sales both represent the direct costs involved in production. However, some companies use ... Read Answer >>
Trading Center