Work in Process or Progress: What It Means in Accounting
Understand Work in Process as a key current asset. Learn how the costs of partially finished goods are calculated and reported on a company's financial statements.
Work in process, or WIP, is an accounting term for goods that are partially completed at the end of an accounting period. These are items on a factory floor that have begun production but are not yet ready for sale. For financial reporting, the value of these unfinished goods is recorded on a company’s balance sheet as a current asset, as they are expected to be converted to cash within one year.
While the terms “work in process” and “work in progress” are often used interchangeably, “work in process” is more commonly applied to manufactured goods with shorter production cycles. In contrast, “work in progress” is frequently used for large-scale, long-term projects like construction.
The Three Core Components of Work in Process
Direct Materials
Direct materials are the tangible inputs physically incorporated into the final product. These are the raw goods moved from storage onto the production floor to begin the transformation process. For a company that builds custom furniture, the wood, hardware, and fabric used to construct a chair would be direct materials. The cost of these materials, including associated freight charges, is a component tracked in the WIP account.
Direct Labor
Direct labor includes the wages, salaries, and benefits paid to the employees who are physically involved in converting raw materials into a finished product. These are the workers on the assembly line or artisans at a workbench whose efforts are directly traceable to a specific item being produced. In the furniture-making example, the wages of the carpenter who cuts the wood and assembles the chair are a direct labor cost.
Manufacturing Overhead
Manufacturing overhead encompasses all indirect costs necessary for production that are not classified as direct materials or direct labor, as they cannot be easily traced to a single unit. Examples include the rent for the factory building, utilities for the production area, and the depreciation of manufacturing equipment. Other overhead costs can include the salaries of factory supervisors or maintenance personnel. These costs are typically accumulated and then allocated to the WIP account using a systematic method, such as applying a rate based on labor or machine hours.
How to Calculate Ending Work in Process Inventory
To determine the value of partially completed goods at the end of an accounting period, companies use a standard formula. The formula begins with the value of WIP from the previous period and adjusts for the costs added and completed during the current period.
The formula is: Beginning WIP Inventory + Total Manufacturing Costs – Cost of Goods Manufactured = Ending WIP Inventory.
Beginning WIP Inventory is the ending WIP value from the prior accounting period, carried over to start the new one. Total Manufacturing Costs represents the sum of all new costs added during the current period. The Cost of Goods Manufactured (COGM) is the total cost of all goods that were successfully completed and transferred out of the production process into the finished goods inventory during the period.
For a practical example, assume a company starts the month with a Beginning WIP Inventory of $20,000. During the month, it adds $50,000 in direct materials, $30,000 in direct labor, and $15,000 in manufacturing overhead, making the Total Manufacturing Costs $95,000. If the company completed goods with a total value of $100,000 (the COGM), the calculation for Ending WIP Inventory would be: $20,000 + $95,000 – $100,000 = $15,000.
Work in Process on Financial Statements
The final value calculated for ending WIP inventory is important for a company’s financial reporting. It is a required disclosure under U.S. Generally Accepted Accounting Principles (GAAP) and provides insight into a company’s operational efficiency and asset management.
The ending WIP inventory balance is reported on the balance sheet within the “Current Assets” section. It is typically listed as a line item under the broader “Inventory” category, alongside raw materials and finished goods. This shows investors the value of assets being converted into sellable products and signals how much capital is tied up in the production cycle.
The accounting for inventory follows a lifecycle that moves costs through different balance sheet accounts before impacting the income statement. The journey begins when raw materials are purchased and recorded in the Raw Materials Inventory. As those materials are used in production, their cost is transferred to the WIP Inventory account, along with direct labor and overhead.
Once production is complete, the total cost of the completed items is moved from the WIP Inventory account to the Finished Goods Inventory account. The costs remain on the balance sheet as an asset until the product is sold to a customer. At the point of sale, the cost is transferred from the Finished Goods Inventory account to the Cost of Goods Sold (COGS) account, which is an expense on the income statement.