work in process (WIP)
Work in Progress (WIP) is a production and supply chain management term that describes partially finished goods awaiting completion. Work in progress refers to the raw materials, labor and overhead costs incurred for products which are at various stages of the production process. Work in progress is a component of the inventory asset account on the balance sheet. These costs are subsequently transferred to finished goods account and eventually to cost of sales.
The practiced business is a component of a company’s balance sheet. The work-in-progress figure only reflects the value of these products at some intermediate stage of production. This does not include the value of raw materials that have not yet been combined into an item for sale. The work-in-progress number also excludes the value of finished products held as inventory in anticipation of future sales
Work in progress is a concept used to describe the flow of manufacturing costs from one area of production to another, and the balance in work in progress represents all production costs incurred for partially completed goods. Production costs include the raw materials and labor used to make the goods and allocated overheads.
When the combs are manufactured, the plastic is taken to production as a raw material. Then labor costs are incurred to operate the forming equipment. Since the combs are only partially completed, all costs are carried over to the work-in-progress. When the combs are completed, the costs are transferred from the work-in-progress to the finished goods, both accounts being part of the inventory account. Costs are transferred from inventory to cost of goods sold (COGS) when the combs are finally sold.
A piece of inventory is classified as a work-in-progress when it has been mixed with human labor but has not reached finished goods condition. Only some of the necessary work was done, but not all. Work in progress, along with other inventory accounts, can be identified by different accounting methods across different companies.
Thus, it is important for investors to distinguish how a company measures work-in-progress accounts and other inventory accounts. One company’s workflow may not be comparable to another’s. Overhead allocations can be based on labor hours or machine hours, for example. A work in progress is also an asset on the balance sheet. It is standard practice to reduce the amount of work-in-progress inventory before reporting is necessary because it is difficult and time consuming to estimate the percentage of completion of a stock asset.
Accountants use several methods to determine the number of partially completed units of work in progress. 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 of work in progress. The cost of raw materials is the first cost to be incurred in this process because materials are required before any labor costs are incurred.
For accounting purposes, process costing differs from job costing, which is a method used when each customer’s job is different. Job costing tracks the costs (for example, the cost of materials, labor, and overheads) and earnings for a particular job, and allows accountants to track expenses for each job for tax purposes and for analysis (auditing costs to see how they can be reduced).
For example, suppose XYZ Roofing offers its resident customers offers to repair or replace their roof. Each roof is a different size and will require specific roofing equipment and a varying number of man hours. Each bid lists costs for labor, materials, and overhead costs for work.
On the other hand, the paths of the process cost system accumulate and determine the costs associated with the manufacture of homogeneous products. Think of a company that makes plastic combs. The plastic is put into a mold in the forming section and then coated before being packaged. As combs move from one department (molding to coating to packaging) to another, more costs are added to production.
Work in progress vs. work in process
Work in process represents partially completed goods. These goods are also referred to as goods in process. For some, work in process refers to products that go from raw materials to finished products in a short period. An example of a running process might include manufactured goods.
Work in progress, as mentioned above, is sometimes used to refer to assets that require a significant amount of time to complete, such as consulting or construction projects. This differentiation may not necessarily be the norm, so either term can be used to refer to incomplete products in most situations. This inventory is found on the manufacturing company’s balance sheet.
Like work in progress, this inventory account may include direct labor, materials, and manufacturing expenses.
Work-in-progress versus finished goods
The difference between work-in-progress and finished goods is based on the relative completion stage of inventory, which, in this case, means sale potential. Work-in-progress refers to the intermediate stage of inventory in which the inventory has started its progression from the beginning as raw materials and is currently undergoing development or assembly into the final product. Finished goods refers to the final stage of inventory, where the product has reached the level of completion where the next stage is selling to the customer.
Terms of work-in-progress and finished goods are relative terms made with reference to the company’s specific accounting for its inventory. They are not absolute definitions of actual materials or products. It is wrong to assume that finished goods of one firm will also be classified as finished goods of another firm. For example, laminated plywood may be a finished product of a lumber mill as it is ready for sale, but the same
Plywood is the raw material for the industrial cabinet manufacturing company.
As such, the difference between work-in-progress and finished goods is based on the stage of completion of the inventory in relation to its total inventory. WIP and finished goods refer to the intermediate and final stages of the inventory life cycle, respectively.
In many organizations we do have WIP that is necessary for stable process in addition to extra WIP. Why do we have extra WIP? Because we love to have it, we make it, we are glad it hides our problems, and we are not trying to reduce it. Extra WIP is not there by mistake. No, we made it.
This extra WIP is so easy to be removed because it does not need modifications in the process. If we decide to decrease it we can…it is just extra. The other part which is the colored in black may need effort to be reduced. So, you can just start with that big part of extra WIP.
Examples for extra WIP sources
We produce large batches of the same product, although we can produce several products without affecting productivity. We just got used to it. There is no technical problem that prevents us from producing a variety of products.
We are a service company and we assign a small number of customer service until it is very crowded then we add more employees. We allowed WIP to exist and then we are trying to reduce it.
We are a service company and we allow more people than we can serve in our service place. There is no reason for allowing more people than our capacity.
We are not trying to match the speed of production of upstream with downstream. We are just happy producing in the upstream.
We are allowing documents to pile at our desks although we can check them frequently and send them to concerned persons.
We are a service company and we are doing nothing to encourage people to visit us at certain times when we have less load.
We can remove extra WIP easily if we really want to. We and our customers will be happier if we do.