What is Work in Progress?

In accounting, a work in progress (WIP) account is an inventory account that includes goods that are in the process of being produced but are not yet finished. This account represents the costs of resources used but not yet turned into completed products. Also refer to the work in progress account as work in process. It is one of the inventory accounts commonly used to track the flow of costs in a production process. Other common inventory accounts include raw materials and finished goods. Inventory accounts are reported as current assets on the company’s balance sheet. Use these accounts for internal analysis as well as external financial reporting.

Cost of Goods Manufactured Calculation

Compute the cost of goods manufactured in a fiscal period using cost data relating to the work in progress account. Simply start with the beginning balance of the work in progress account. Then add the costs of resources transferred into the account during the relevant period. Finally, subtract the ending balance of the work in progress account for that period. As a result, you will get the cost of goods manufactured for that period.
Cost of Goods Manufactured = Beginning Balance + Transfers In – Ending Balance

Flow of Costs

Costs that are represented in the work in progress account include direct materials, direct labor, and manufacturing overhead. As work proceeds in a production process, costs flow from the raw materials inventory account, into the work in progress inventory account, and then into the finished goods account. Represent all of these costs as current assets in inventory accounts on the balance sheet. Once you sell the finished goods, transfer the associated costs to the cost of goods sold account on the income statement.
Raw Materials → Work in Process → Finished Goods → Cost of Goods Sold

Just-in-Time and WIP

The work in progress account represents a cost to the company. These costs are storage costs and obsolescence costs. But holding inventory is costly – it takes up storage space and requires supervisory monitoring. The longer a company hold goods in storage, the higher the risk of these goods becoming obsolete. Therefore, they will decrease in value. Just-in-time inventory system strives to minimize the amount of inventory held in the work in progress account. Therefore, it reduces the costs associated with holding inventory.

Source:
Hilton, Ronald W., Michael W. Maher, Frank H. Selto. “Cost Management Strategies for Business Decision”, Mcgraw-Hill Irwin, New York, NY, 2008.
See Also:
Balance Sheet
Working Capital
Working Capital Analysis
Income Statement
Throughput
Inventory Shrinkage