What is the term for the cost of the partially completed goods at the end of the period?

At any given time, a portion of the inventory in a manufacturing operation is in the process of being transformed from raw materials or components into finished goods. Refereed to as a work in progress, a work in process or a WIP, this part of the overall inventory is an asset. In order to properly account for partially completed work, a business needs to determine the ending work in process inventory at the end of each accounting period. Work in process is also a useful measure for management, because it provides a tool for tracking production flow and costs.

Work in Process Overview

Work in process is the term for a product that is being manufactured, but which is not yet completed. That is, WIP doesn't include raw materials that have not been used yet or completed goods. Work in process inventory is an asset The ending work in process inventory is simply the cost of partially completed work as of the end of the accounting period. Ending WIP is listed on the company's balance sheet along with amounts for raw materials and finished goods.

The terms work in progress and work in process are usually treated as synonyms. This is correct, but some people make a distinction between the two. Work in process may refer specifically to products that are completed in a short time. Work in progress is then taken to mean production that takes considerable time, such as a construction project.

For most manufacturing operations, the costs that are included in an ending work in process inventory are raw materials or parts used, direct labor and manufacturing overhead. For construction or other lengthy projects, the components of a WIP are often listed as materials, wages and benefit costs for labor, subcontractor costs and expenses. Either way, determining the value of work in progress can be time consuming, so companies try to minimize the WIP directly before the end of the accounting period.

How to Calculate Total Work in Process

Companies usually calculate total work in process at the end of a month, year or other accounting period. This WIP figure becomes the ending work in process inventory. It also used the beginning figure for the next accounting period. The work in process formula is the beginning work in process amount, plus manufacturing costs minus the cost of manufactured goods.

Suppose the ABC Widget Company has a beginning WIP inventory for the year of $8,000. Over the course of the year, the company incurs manufacturing costs of $240,000 and produces finished goods costing $238,000. You have $8,000, plus $240,000 minus $238,000, which leaves an ending work in process inventory of $10,000.

This work in process formula yields an estimate, rather than an exact figure. It does not take into account added costs that may be incurred as work is completed, such as the cost of scrap, spoilage or the need to rework some items. As an alternative, a company can do a physical count of the work in process to determine the actual amount of raw materials in use and then to allocate other costs, based on the current stage of the manufacture of each unit. However, this is very time-intensive, and generally, it is not done. Some companies don't record the WIP at all. Often, this is the case when the manufacturing operation is short enough to allow all work in process to be completed when the period ends and current accounts are closed.

Significance of a Work in Process

The ending work in progress inventory is important for a couple of reasons. Because it is an asset, not calculating the WIP and including it on the firm's balance sheet may cause the total inventory to be undervalued and the cost of goods to be overstated. WIP is also useful information for managers. A high WIP can indicate that the production process is not flowing smoothly and that there may be bottlenecks in the process. By tracking WIP, managers can identify and eliminate such problems.

What is Work in Progress?

Work in progress (WIP) refers to partially-completed goods that are still in the production process. These items may currently be undergoing transformation in the production process, or they may be waiting in queue in front of a production workstation. Work in progress items do not include raw materials or finished goods. Work in progress is usually comprised of the full amount of raw materials required for a product, since that is added at the beginning of production, plus the cost of additional processing as each unit progresses through the various manufacturing steps.

WIP is one of the three types of inventory, of which the others are raw materials and finished goods.

Presentation of Work in Progress

Work in progress may be reported on the balance sheet as a separate line item, but is usually so small in comparison to the other types of inventory that it is aggregated with the other inventory types into a single inventory line item.

Accounting for Work in Progress

Work in progress is typically measured at the end of an accounting period, in order to assign a valuation to the amount of inventory that is on the production floor. It is extremely difficult to assign an accurate cost to a WIP item, since there may be many WIP items in various stages of completion as of period-end. To make the accounting process easier, some companies complete all WIP items and transfer them into finished goods inventory prior to closing the books, so that there is no WIP to account for. An alternative is to assign a standard percentage of completion to all WIP items, on the theory that an average level of completion will be approximately correct when averaged over a large number of units.

Work in Progress Reduction

From a production theory perspective, there has been an increasing emphasis on reducing the amount of WIP units in the production process at any one time. By reducing WIP, there is less clutter in the production area and less chance of having defective products build up before being discovered, while the total investment in inventory can be kept as low as possible. Minimal WIP investment is a cornerstone of the just-in-time system of manufacturing. However, an inventory buffer is needed in front of any constrained workstations in the production area, to ensure an even flow of goods.

How to Calculate Ending Work in Progress

It is possible to estimate the amount of ending work in progress, though the result can be inaccurate, due to variations caused by actual scrap levels, rework, and spoilage. The calculation of ending work in progress is:

Beginning WIP + Manufacturing costs - Cost of goods manufactured = Ending work in progress

Work in Progress as Collateral

From a borrowing perspective, few lenders will allow WIP to be used as collateral for loans, since partially-completed inventory would be difficult for them to sell in the event of a borrower default, unless it is very close to completion.

Terms Similar to Work in Progress

Work in progress is also known as work in process.

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