Work-in-process inventory definition
/What is Work-in-Process Inventory?
Work-in-process (WIP) inventory refers to the materials that are in various stages of production within a manufacturing or production environment, but are not yet finished goods ready for sale. WIP inventory exists between the raw materials stage and the completed product stage. It includes all the partially completed products or components that are undergoing various processes, such as assembly, machining, or other manufacturing steps. These items are typically located in the production area, though they could also be held to one side in a buffer storage area.
Accounting for Work-in-Process Inventory
The cost of work-in-process typically includes all of the raw material cost related to the final product, since raw materials are usually added at the beginning of the conversion process. Also, a portion of the direct labor cost and factory overhead will also be assigned to work-in-process, based on its percentage of completion; more of these costs will be added over time, as part of the remaining manufacturing process.
Accounting Best Practices for Work-in-Process Inventory
It is time-consuming to calculate the amount of work-in-process inventory, determine the percentage of completion, and assign a cost to it, so it is standard practice in many companies to minimize the amount of work-in-process inventory just prior to the end of a reporting period. Some organizations avoid the issue entirely by outsourcing any work that involves work-in-process inventory.
Presentation of Work-in-Process Inventory
Work-in-process is an asset, and so is aggregated into the inventory line item on the balance sheet (usually being the smallest of the three main inventory accounts, of which the others are raw materials and finished goods).
Production Best Practices for Work-in-Process Inventory
It is generally considered a manufacturing best practice to minimize the amount of work-in-process in the production area, since too much of it interferes with the process flow. Also, if work-in-process is allowed to pile up at one work center before being shifted to the next one, this means that a series of flawed units could build up before being discovered at the next work center. Further, production expediters may be used to force certain key jobs through the pile of work-in-process jobs, which throws the production system into an even greater muddle. Instead, work-in-process should move between work centers one unit at a time, with very little inventory piling up between workstations. Ideally, a lean production environment should contain so little work-in-process inventory that the amount on hand is immaterial.
Construction Work-in-Process
Work-in-process is a much more significant issue when it involves the construction of a building. In this case, work-in-process includes the accumulated cost of the asset, which will continue to increase until the structure is declared complete. At that point, the balance in the work-in-process account is recognized as a building fixed asset, and is shifted into the building fixed assets account.
Work-in-Process Inventory FAQs
What are equivalent units of production?
Equivalent units of production convert partially completed units into the equivalent number of fully completed units. Used in process costing, they help allocate materials and conversion costs between completed goods and ending work in process. For example, 100 units that are 50 percent complete equal 50 equivalent units.
How is manufacturing overhead assigned to work in process?
Manufacturing overhead is assigned to work in process using an allocation rate based on a suitable activity driver, such as machine hours, direct labor hours, or labor cost. The applied overhead is debited to work in process. Any difference between applied and actual overhead is adjusted separately.
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