Work-in-progress (WIP)

What is work-in-progress?

The word "work-in-progress" refers to partially finished products waiting to be completed in the supply management and manufacturing sectors. Labour, raw materials, and overhead expenses associated with items in various production process phases are referred to as WIP.

WIP, on the other hand, is a balance-sheet element of the inventory asset account. Such expenses are then moved to the finished products account and, finally, to the cost of sales.

Consider the case where ABC Roofing offers bids for roof repair or replacement to its housing clients. Each roof is varied in size and would necessitate various roofing equipment and a variable number of labour hours. Therefore, every bid includes all the work's overhead, material, and labour expenses.

WIP is an inventory that has begun the production process but is no longer in raw materials inventory and is also not a finished good. WIP is treated as an asset on the balance sheet because the funds were used to create a finished item. WIP, on the other hand, is worthless because the good hasn't been finished.

WIP is also known as a semi-finished product. It's a step where raw materials are collected from the store and put through a conversion procedure to make finished goods. These are partly processed raw materials that are processed on the manufacturing floor after undergoing many rounds of treatment before being converted into a finished item.

Businesses that sell extremely customised products, such as hand-made items on Etsy, are more likely to keep track of their WIP inventory than those who buy finished goods straight from a maker or supplier.

Moreover, a process costing system keeps track of and assigns expenses related to the production of homogeneous products. Take, for instance, a firm that makes plastic combs. In the moulding department, the plastic is poured into a mould and then painted before being packaged. More expenses have been added to production due to the combs being moved from one department to another, from moulding to painting to packaging.

Frequently Asked Questions (FAQs)

What is the importance of WIP information?

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WIP inventory figures help calculate manufacturing process metrics. This allows production managers to adjust the output of their assembly line in response to market fluctuations. As a result, managers can limit or ramp up production based on the availability of supplies in manufacturing bins.

WIP can be used to assess the health of a supply chain. A high number of WIP items and a low number of finished goods items indicate inefficiency on the manufacturing floor. WIP products suffer storage and warehousing charges, which result in additional balance-sheet expenses. These costs are unable to be transferred to other departments or re-invested in the production process. Firms strive for the lowest possible WIP numbers for this reason.

On a firm's balance sheet, WIP is frequently categorised as a current asset because available WIP inventory at various levels of completion could be transformed into manufactured items, resulting in a profit for the firm. This inventory is either retained on a firm's balance sheet or written off based on how long it is on the factory floor.

WIP denotes an intermediate stage in the production method. It takes place before the finished goods and after raw materials are transferred from the warehouse to the production floor. It is categorised as finished products inventory once the goods have passed the WIP stage. As a result, when products are sold, WIP expense is one of the many expenses rolled up to produce the ultimate cost of goods sold on the balance sheet.

What is some work-in-progress inventory examples?

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Consider a vehicle firm that produces automobiles. After painting and finishing, it moves through numerous workstations for each process to be completed systematically. Then, finally, it moves to the inventory. More costs are added to the manufacturing process when the cars go from one department to the next.

Assume XYZ is a firm that makes widgets. The corporation estimated the number of widgets it had in stock on the last day of the month. It observes that it only had 20,000 widgets, with 10,000 of those being partially completed widgets. These partially completed widgets are listed as WIP widgets on the balance sheet's left side.

What's the difference between a work-in-progress and a work-in-process?

The terms "work-in-progress" and "work-in-process" are commonly interchanged. This is because the two words are conceptually similar because they refer to costs associated with moving partially finished goods or services across the manufacturing floor.

Generally, work-in-process inventory refers to partly produced products that move quickly from raw material to finished goods. For instance, custom requirements based on the client are common in manufacturing and consulting projects. Before being offered to the consumer or client, the manufactured product passes through a production process in a very short period. Inventory is known as work-in-process inventory in such instances.

In the construction sector, the word "work-in-progress" refers to the costs of a building project rather than a finished product. It refers to a production method that takes longer. For example, consider the situation at the construction firm. The time needed to create a good, in this case, a building is substantially longer and involves more material and labour than a consulting or factory project.