WIP Inventory (Work-in-Progress)

WIP Inventory (Work-in-Progress) is a crucial line item on the balance sheet of a manufacturer and is also an important indicator of their supply chain health. The accounting of the WIP Inventory (Work-in-Progress) helps a company determine the value of its inventory.

Meaning and Definition of WIP inventory (Work-in-progress) 

WIP inventory (Work-in-progress) is supply-chain management and production-related term which describes partially completed goods awaiting completion. It refers to the raw materials, overheads, and labour costs incurred for goods at different stages in production. WIP inventory is a component of the inventory asset on the company’s balance sheet. 

The work-in-progress balance represents all the costs of production that are incurred for partially finished goods.

Formula and Calculation of WIP Inventory

The WIP Inventory (Work-in-Progress) cost is a bit more intricate than determining the cost of finished goods, as it involves a lot more moving parts. However, before attempting to compute the value of WIP inventory, we need to know some terms and calculations first. 

Beginning WIP Inventory Cost – The beginning cost of WIP inventory refers to the previous period’s WIP balance on the balance sheet. In other words, it’s the ending WIP inventory from the last period, which is carried over as the beginning balance for the new period.

Manufacturing Costs – The manufacturing costs refer to all the costs related to manufacturing the finished product. It includes the raw material cost, labour cost, and overhead costs. Higher the WIP inventory is going through the manufacturing process, the higher the cost of raw materials and cost of labour. The formula for manufacturing cost is as below: 

Manufacturing Costs = Cost of Raw Materials + Direct Labour Costs + Manufacturing Costs 

Cost of Finished Goods – Finally, you require the cost of finished goods, the total cost of inventory that is ready to be sold. This includes the cost of manufacturing, raw material cost, and overhead costs. 

Once all of the above variables are determined, the formula to calculate the WIP inventory is as below:

Ending WIP Inventory = Beginning WIP Inventory + Manufacturing Costs – Cost of Finished Goods

Work-in-Progress Vs Work-in-Process Inventory

Most businesses find no difference between the terms Work-in-Progress and Work-in-Process, so they use them interchangeably. However, there’s a distinction based on the terms progress and process usage.

The term “progress” infers a prolonged period during which the product is finished, probably covering multiple accounting periods. Given such implied duration, work-in-progress typically refers to prolonged-term projects like construction or consulting, as well as customised product work. On the other hand, the term “process” infers that there’s a production process in place where goods are produced under a uniform and ongoing manufacturing system. Hence, work-in-process is readily applied to a manufacturing environment.

In a nutshell, there are some differences in how you can use the terms work-in-progress and work-in-process. However, these are fine differences to use either term in most cases.

Accounting for Work-in-Process Inventory

There are several journal entries to document the WIP inventory transactions. In a computerised landscape, the accounting system generates most of the transactions. Nonetheless, the following are the journal entries for booking the WIP inventory.

For Purchase of Inventory:

Account	Debit	Credit
Raw Materials Inventory	xxx
Accounts Payable		xxx

Moving Raw Materials to Work-in-Process:

Account	Debit	Credit
Overhead Cost	xxx
Accounts Payable		xxx

Recording Indirect Cost of Production:

Account	Debit	Credit
Work-in-process Inventory	xxx
Overhead Cost		xxx

Allocating the Overheads:

Account	Debit	Credit
Finished Goods Inventory	xxx
Work-in-process Inventory		xxx