Work in Progress (WIP)
Work in progress (WIP) is the part of inventory that is currently being worked on and is yet in the production process.
Work in progress is a stage in between the raw material and finished goods. It is no longer raw material because it has undergone some processing in the production process. It is also not yet finished goods because more processing has to be done to put it into its salable condition. WIP includes the items that are being fabricated or waiting in a queue for further processing or in buffer storage.
The aim of optimal production management is to minimize the work in progress because it has costs associated with it. Work in progress requires storage space, represents tied-up funds not available for investment and carries an inherent risk of earlier expiration or damage of shelf life of the products.
The accounting of work in progress is similar to the accounting of inventory. Like any other stock it is valued at the lower of cost and net realizable value. Cost includes the cost of the raw materials, labor cost and other processing costs. Net realizable value is the price for which an item could be sold less costs involved in selling.
The cost of processing in included in the value of work in progress in order to match costs with revenues in accordance with the matching or accrual principle. If the value of inventory falls, an unrealized loss has been incurred and this should be properly accounted for to reflect in the financial statements.
So far we have discussed the work in progress which is inventory in the production process. But work in progress can also be of capital in nature. Work, such as construction of an asset, that has not been completed but has already incurred a capital investment from the company is also referred to as capital work in progress. It is usually recognized as an asset on the balance sheet.
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