Understanding Work-in-Progress (WIP)
Work‑in‑progress (WIP) refers to goods that are partially completed in the production process. WIP includes the costs of raw materials that have been incorporated, direct labor applied, and a share of manufacturing overhead. On the balance sheet WIP is reported as a current asset until the goods are finished and ultimately sold.
How WIP moves through the accounts
- Raw materials are recorded as inventory.
- As production begins and labor/overhead are added, costs move into WIP.
- When products are completed, WIP is transferred to finished goods inventory.
- When finished goods are sold, costs move from inventory to cost of goods sold (COGS).
Example: A comb manufacturer records plastic as raw material. As molding, painting and packaging add labor and overhead, costs sit in WIP. When combs are complete they move to finished goods and then to COGS upon sale.
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Common accounting methods
- Process costing: Used for homogeneous products moving through departments (e.g., plastics, chemicals). Costs are accumulated by process and averaged across units.
- Job costing: Used when each job is different (e.g., roofing, custom construction). Costs are tracked for each job or contract.
Overhead allocation methods (labor hours, machine hours, etc.) and the percentage‑of‑completion assumptions affect how much cost is recorded in WIP and can make WIP figures differ between companies.
Calculating WIP
Two typical approaches:
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- Percentage‑of‑completion (cost‑based)
- Estimate the percentage of total costs (materials, labor, overhead) incurred for units in production.
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WIP = Sum of (costs incurred to date for each job or process).
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Ledger formula
- Ending WIP = Beginning WIP + Manufacturing Costs Incurred (direct materials + direct labor + manufacturing overhead) − Cost of Goods Manufactured
Construction and long‑term contracts often use milestone or percent‑complete billing to recognize progress.
WIP vs. Work‑in‑Process vs. Finished Goods
- Work‑in‑progress and work‑in‑process are often used interchangeably to mean partially completed inventory.
- Some firms distinguish them: “work‑in‑process” for short‑cycle manufacturing; “work‑in‑progress” for longer, project‑based activities (construction, consulting). This distinction is not universal.
- Finished goods are completed products ready for sale. Classification can vary by company: what one company calls finished goods may be raw material for another.
Practical considerations and why it matters
- WIP valuation requires estimates (percentage complete, overhead allocation), so it can be subjective and vary across companies.
- Companies often try to minimize WIP to reduce storage costs, simplify accounting, and lower obsolescence risk.
- For investors and analysts, understanding a company’s costing method and WIP policy is important for comparing inventory levels, margins, and efficiency.
Key takeaways
- WIP represents partially completed goods and the associated costs (materials, labor, overhead).
- It is recorded as a current asset until goods are finished and sold.
- Accounting method (process vs. job costing) and overhead allocation affect WIP measurement.
- Terminology and classification can differ between industries; always check a company’s accounting policies for comparability.