Work-in-progress in accounting: definition and example

By Indeed Editorial Team

Published 5 December 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

When a company develops or manufactures a product, it works through various stages before they release it onto the open market. One of these stages is the work-in-progress (WIP) stage, which denotes sold but unfinished goods. The work-in-progress stage requires some special considerations for reporting, so if you're a financial professional, it's useful to know about this. In this article, we define what work-in-progress in accounting means, explain its importance and offer an example.

What is work-in-progress in accounting?

Work-in-progress in accounting describes certain incomplete products not yet ready for release into the market. They factor in the overhead costs, labour and raw materials used for each production stage. Accounting teams list work-in-progress products as assets for the company balance sheet to create an accurate flow of costs for all stages in manufacturing. These costs accrue incrementally into the finished goods before transferring them to the cost of sales account on the company balance sheet.

If a product requires more human labour, companies don't view it as a final good but as a work-in-progress. Accounting professionals can quantify these products differently by bringing in various accounting methods. Certain companies might base overhead costs around machine hours, while others focus on labour hours. Their choice largely depends on the infrastructure brought into manufacturing the goods. To understand the company's finances better, investors determine how the company is outlining their inventory accounts.

Related: A complete guide to understanding production factors

How does accounting measure work-in-progress?

Accounting teams view inventory into three distinct categories, which include raw materials, work-in-progress and finished goods. Work in progress in accounting terms are items that are reportable as separate line items for the company balance sheet. Their quantity may be quite small, which allows accounting teams to bring work-in-progress items in as a single line item for inventory. Companies aim for low levels of work-in-progress inventory near reporting periods, as it's challenging to provide accurate costs for these types of items. Companies attempt to do this in several ways, including:

  • Before a company closes its books, they complete all work-in-progress inventory to move them over to finished goods.

  • The company creates an average percentage of completion for work-in-progress inventory.

  • Analysts create an approximation of results by finding the average across lots of items, though this may be an unreliable approach because of issues such as spoilage and scrap.

Another issue is how to value the total amount of units still in the work-in-progress phase during production. Accounting teams look at the percentage of total incurred overhead costs, labour costs and raw material costs to find out how many units are still work-in-progress. As production uses raw materials before labour, looking at raw material costs is usually the first indicator.

Related: Calculating finished goods inventory formula (with example)

What is the importance of tracking work-in-progress goods?

Work-in-progress is essential for accounting teams and organisations because it's one of the most dependable ways to monitor how businesses handle production capacity and the overall progress of production. Understanding work-in-progress inventory levels is also useful for certain financial processes, such as loan applications. Banks and other lenders rarely provide loans using work-in-progress as collateral, as it's too hard to sell these units if a borrower defaults on their loan. Lenders may look at work-in-progress to evaluate credit availability for organisations, though.

Evaluating work-in-progress inventory levels and schedules is usually a job for business owners or senior management. Doing so helps them understand more about the state of production in the business and it's a good indicator of financial health. Because of this, companies do well to monitor work-in-progress and keep up-to-date records.

How do you calculate work-in-progress on balance sheets?

Calculating a work-in-progress inventory is a challenging task for accounting teams, as it incorporates multiple items across varying levels of production. To make this process less complex, organisations combine entire work-in-progress lists and move them over to finished goods prior to closing the books. This helps the company and accounting team by ensuring that there aren't any outstanding work-in-progress items to consider.

Another approach that companies might consider is to set a standard percentage for all work-in-progress inventory. This creates an average figure that is good enough to work with when averaged across larger unit numbers. Companies can also estimate the amount of ending work-in-progress levels, although it isn't always accurate because of factors such as spoilage or scrap. The formula brought in to create this estimate is the following:

Beginning work-in-progress + manufacturing costs - cost of goods manufactured = resulting work-in-progress

Related: How are the different types of products classified?

What is work-in-progress variance?

Work-in-progress variance arises when there's a difference in the value of the complete goods report and the total reported cost of production for items. Companies create an individual work-in-progress account to keep the production records for the business. This makes the job harder for accounting teams for assessing work-in-progress though, as production continues at a consistent rate, but reconciling can't match that level of consistency.

To make this process easier, companies reconcile at the order level. It's easier to account for work-in-progress value after production is complete. Production costs for the company appear as a positive value, while the value of goods in production appears as a negative value. The net value for all activities stems from the variance in the production order. There are a few factors that create this variance, largely because of human error. So assessing work-in-progress variance helps to account for the gap between actual and reported figures.

Work-in-progress vs work-in-process

Work-in-progress and work-in-process are two terms that cause confusion because people often use them interchangeably, but they have slightly different meanings. Work-in-progress describes any unfinished inventory for the company, even if it isn't close to completion. It's a term more commonly found in construction and consulting. Work-in-process goods, also known as goods in process, is a phrase that describes mostly ready products, one step away from finished goods. It's a term commonly used in manufacturing.

Although they have subtle differences, these two terms are similar too. They both refer to partially completed goods in a production line. They both include overhead costs, raw material costs and labour costs when reporting on balance sheets.

Related: What is manufacturing? With five manufacturing processes

Work-in-progress vs finished goods

The major difference between work-in-progress inventory and finished goods inventory is their state of completion and overall readiness for sale. Work-in-progress items fall in the intermediary state, as they're in the production schedule already, but require further progress before they become a complete product. Finished goods are at the end stage of progress, ready to go on sale to customers.

These two terms are relative, which allows companies to assign work-in-progress and finished goods to certain stages of the manufacturing process. They aren't rigid definitions of where a product falls in this process. Rather, they indicate a phase. One company might define certain items as finished goods, while others still class them as a work-in-progress. For example, a lumber company might define wooden planks as finished goods, but a luthier still views the wooden planks as work-in-progress.

Work in progress vs other stages in the manufacturing process

The manufacturing process outlines three distinct types of inventory and stages, including:

  • Raw materials: These materials are essential for production and change depending on the type of product made, ranging from metal alloys to plastic components.

  • Work-in-progress: This refers to raw materials that are in the process of manufacturing or production. They're incomplete but have moved on from being simply raw materials.

  • Finished goods: These are the last stage of manufacturing and inventory as they're ready to enter markets and make it to customers. These items have finished their manufacturing process.

Although these are flexible terms that vary depending on the company, they still describe the same order of events. The difference between these three categories is their chronological stage in the manufacturing process and product completion. It's because of these differences from company to company that the terms focus on the life cycle of an inventory's level of completion based on total inventory for a business.

Related: Supply and demand diagram (definition, types and examples)

Example of work-in-progress

To help you understand what work-in-progress means, look at the example of a production process below to add context to the term:

  1. All the required raw materials, such as wood, move into the production phase.

  2. The next stage uses the wooden raw material to create planks which incur specific labour costs.

  3. The company now considers the wooden planks as partially completed goods. So all associated costs go into the work-in-progress line for the company balance sheet.

  4. Once the planks change into a chest of drawers, the costs move to finished goods.

  5. Finally, when the chest of drawers goes to a customer, the costs incurred move from the inventory to the cost of goods sold on the balance sheet.

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