Work in progress (WIP), sometimes referred to as work in process, is the sum of all costs put into the production process to manufacture products that are partially completed. WIP refers to 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 , and these costs are 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 materials and labor used in making goods as well as allocated overhead.
The Differences Between Job Costing and Process Costing
Process costing is different from job costing, which is a method used when each customer job is different. Assume, for example, the XYZ Roofing provides each residential client a bid for a roof repair or replacement, and each roof is a different size and will require specific roofing equipment and a unique number of labor hours. The customer bid lists the labor, material and overhead costs for the work.
On the other hand, a process costing system is used when a business makes identical (or nearly identical) products by moving from one production department to the next. If a company makes plastic combs, for example, the plastic is put into a mold in the molding department, then the plastic is painted and the combs are packaged. As the combs move from one department to the next, more costs are added to production.
How Costs Are Assigned to WIP
When the combs are manufactured, a certain amount of plastic is moved into production as a raw material, and then labor costs are incurred to operate the molding machine. 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, and both accounts are part of inventory. Costs are moved out of inventory and into cost of goods sold, an expense account 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. Raw material 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 totally comparable to another company's. Allocations of overhead can be based on man-hours or machine-hours, for example.