Work in progress

Work in progress (WIP) refers to partially-completed goods that are still in the production process. These items do not include raw materials or finished goods. Work in progress 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.

Work in progress is typically measured at the end of an accounting period, in order 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.

Work in progress 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.

It is extremely difficult to assign an accurate cost to a WIP item, since there may be many WIP items in various stages of completion as of period-end. To make the accounting process easier, some companies complete all WIP items and transfer them into finished goods inventory prior to closing the books, so that there is no WIP to account for. An alternative is to assign a standard percentage of completion to all WIP items, on the theory that an average level of completion will be approximately correct when averaged over a large number of units.

It is possible to estimate the amount of ending work in progress, though the result can be inaccurate, due to variations caused by actual scrap levels, rework, and spoilage. The calculation of ending work in progress is:

Beginning WIP + Manufacturing costs - Cost of goods manufactured

From a production theory perspective, there has been an increasing emphasis on reducing the amount of WIP units in the production process at any one time. By reducing WIP, there is less clutter in the production area and less chance of having defective products build up before being discovered, while the total investment in inventory can be kept as low as possible. Minimal WIP investment is a cornerstone of the just-in-time system of manufacturing. However, an inventory buffer is needed in front of any constrained workstations in the production area, to ensure an even flow of goods.

From a borrowing perspective, few lenders will allow WIP to be used as collateral for loans, since partially-completed inventory would be difficult for them to sell in the event of a borrower default, unless it is very close to completion.

Similar Terms

Work in progress is also known as work in process.