Work in Progress (WIP) refers to partially-completed goods that are still in the production process. These items may currently be transforming the production process, or they may be waiting in a queue in front of a production workstation. Work in progress items does not include raw materials or finished goods. It 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.
It is typically measured at the end of an accounting period, to assign a valuation to the amount of inventory that is on the production floor. WIP is one of the three types of inventory, of which the others are raw materials and finished goods. It 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.
How to Calculate Work in Process Inventory
Calculating the value of WIP inventory involves associating a cost with a percentage of completion. This can be a bit time-consuming, so it’s typically best to tally it up at the end of your accounting period to minimize uncertainty on your company’s balance sheet.
Ending WIP Inventory = (Beginning WIP Inventory + Production Costs) – Finished Goods Cost
A company accounts for the work in progress towards the end of the accounting period. The accounting of WIP helps a company to determine the value of inventory that is in the production process.
Generally, there are three types of inventory:
- Raw material
- Work in Progress
- Finished Goods
Importance of Work in Progress
WIP is used to keep an eye on the production capacity utilization of the company, as well as, production progress is to understand their WIP. Also production capacity for the particular period.