Definition:
Work-in-progress (WIP) refers to items that are not entirely finished and are at various stages of the manufacturing process.
What is Work-in-progres?
WIP is shown in the balance sheet and includes the expenses of raw materials, labor, and overhead spent in bringing the product to the point in the production cycle where it is. Work-in-progress does not include finished items held in the company’s warehouse or raw materials that have not yet been processed. While a product goes through the supply chain, its manufacturing expenses often rise, raising the cost of WIP. If the product is purchased, it transfers from the category of WIP to the category of ready-made goods, and then from the category of ready-made stocks to the category of cost of goods sold.
How does work-in-progress work?
Work in progress (WIP) is a component of a company’s balance sheet that includes any items that are presently in production.
Companies may use it to track the product’s location in the manufacturing process as well as the rate at which it moves from one step to the next one. WIP is often a mix of raw materials, equipment, human labor, and overhead. Overhead costs include indirect expenditures like rent and utilities.
Work in progress is a stage between the original raw materials and the finished result. It is worth mentioning that the raw material does not belong to the work in progress because it has not yet been employed in the creation of this product. It also does not include final items that have already passed the production process and are ready for sale.
Work-in-progress VS. finished products
Work-in-progress refers to items that have already entered the manufacturing process but are not yet final products. The inability of the corporation to sell these things is a distinguishing aspect of work-in-progress.
Completed items, on the other hand, have completed the full production line and are available for purchase. Generally, goods follow the same production process:
Raw materials > Work-in-progress > Finished products.
It should be mentioned that the distinction between raw materials and completed goods is entirely subjective, based on the goals for which the goods are used by the business. Let’s imagine a corporation makes and sells buttons. A button is a finished product for it, ready for sale. On the other hand, this button is a raw material for a corporation that employs buttons to make the product it sells, for instance, a clothing factory. The way a company defines a product on its balance sheet is determined by what the company does with that product.
How to maintain records of work-in-progress?
Work in progress is recorded as a current asset on the balance sheet, usually as part of inventories. Any assets that may be turned into cash within a year are considered current assets. Because the majority of things may be manufactured and sold in less than a year, inventories are considered current assets.
When a corporation initially purchases raw materials for the creation of goods, these raw materials are shown in the balance sheet as a special subclass of assets. The materials are then shifted to the category of work in progress on the balance sheet when the firm has already used them in the creation of items. And once the firm has completed production and is ready to sell the product, it reflects on the balance sheet as a finished product.
Gradually, once a product is sold, the value is deducted from the inventory shown on the balance sheet and reflected in the income statement as a component of the expenses of goods sold.
How to calculate the work-in-progress?
To calculate the work-in-progress, add up all of the expenses associated with getting the product to the point where it is in the manufacturing process. The formula is as follows:
WIP = cost of raw materials + cost of labor + cost of overhead
The importance of work-in-progress
The inclusion of work-in-progress in the balance sheet helps the firm to account for inventory that, while not yet completed, will generate more revenue in the near term. Work in progress is more expensive than raw resources. Since they are entirely ready for sale, finished items are more expensive than work-in-progress. The product gains value as it progresses through the manufacturing process.
Analysts as well as investors can also benefit from the work-in-progress indication by researching the company’s production line. For instance, a corporation may have more goods in work-in-progress than normally, yet sales have not grown. This expansion might indicate that there are issues with the production cycle, or that the business has reasons to expect that sales will expand in the nearish term.
If additional goods appear in the work-in-progress stage, this might be a favorable sign, especially if the company’s sales have already improved. In this condition, a growth in the volume of work-in-progress indicates to investors that it is possible to invest more in labor and capital.
Consequently, knowing the factors that lead to changes in work-in-progress is critical to recognizing their impact for the business.