Jump to content

Work in process

From Wikipedia, the free encyclopedia
This is an old revision of this page, as edited by Jadedhippo (talk | contribs) at 23:29, 13 July 2022 (punctuation). The present address (URL) is a permanent link to this revision, which may differ significantly from the current revision.
"Work in progress" redirects here. For other uses, see Work in progress (disambiguation).

Work in process (WIP),[1][2][3][4] work in progress (WIP),[5][6][7] goods in process,[1] or in-process inventory are a company's partially finished goods waiting for completion and eventual sale or the value of these items.[8] The term is used in production and in supply chain management. WIP inventory is also an indicator of the health of a supply chain.[9]

Production management may aim to minimize WIP in order to reduce storage space and bound capital, and minimize risk of earlier expiration of shelf life of the products. A queue leading to a production step shows that the step is well buffered for shortage in supplies from preceding steps, but may also indicate insufficient capacity to process the output from these preceding steps.

WIP inventory in accounting

WIP inventory refers to goods that are in production and not yet a finished good.[10] On the balance sheet, WIP inventory is aggregated into the inventory line under current assets along with raw materials and finished goods.[11]

To calculate WIP inventory at the end of an accounting period, the following 3 figures are required: beginning WIP inventory, production costs, and finished goods. Beginning WIP inventory is the WIP inventory figure from the previous accounting period. Production costs includes all costs associated with manufacturing a product, such as raw materials, labor, and overhead costs. Finished goods is the total value of goods ready for sale in the current accounting period. The formula for calculating WIP inventory is as follows: beginning WIP inventory + production costs – finished goods.[9]

WIP inventory in supply chain management

WIP inventory calculations can help a company assess their supply chain health and guide in supply chain planning.[9] In most cases, it is ideal to have low WIP inventory levels[9], and companies that manage their inventory level efficiently tend to have lower costs.[12] Managing WIP inventory requires coordination between several functions within a company, as well as with suppliers and customers.[12] Higher WIP inventory levels are advantageous in that they can support a surge in demand, as well as improve cycle time since there is more material in production. However, this can also increase storage costs and obsolescence risk, as well as lead to waste if demand is lower than expected.[13]

WIP in construction projects

Work-in-process in construction accounting identifies the value of construction projects that are currently being worked on by the construction firm. To properly account for each project, four values are needed for each project at the end of any given month (or period):

  1. the sales price (excluding sales tax) for the project
  2. the total cost estimate for the project
  3. the costs-to-date
  4. the billed-to-date

By taking the costs-to-date divided by the cost estimate, the percentage complete for the project is calculated. For example:

  • Assume a project is estimated to cost $70,000 by the time the work is complete
  • Assume at the end of December, $35,000 has been spent to date for the project
  • $35,000 divided by $70,000 is 50%; therefore, the project can be considered 50% complete at December 31

Calculation of the percentage complete is a valuable tool in determining how much the client should be billed. It is important that billings, and even collection of these billings, are greater than the costs expended to do the work. This ensures that the client is directly funding the construction work and that the contracting firm minimizes borrowing on behalf of the client. Using the example above, suppose the following:

  • the sales price of the project is $100,000
  • $100,000 times 50% (the level of completion) = $50,000

Therefore, for the period ending December 31, the client should be invoiced at least $50,000 to properly fund the work.

Tax treatment

In the United Kingdom, HMRC has no specific definition of work-in-process, but three different types of uncompleted items are identified for tax purposes:

  • manufactured products
  • contracts for services
  • construction contracts[14]

References

  1. ^ a b "Work-in-process dictionary definition | work-in-process defined". business.yourdictionary.com. Retrieved 2014-07-12.
  2. ^ "WORK IN PROCESS DEFINITION". ventureline.com. Retrieved 2014-07-12.
  3. ^ "What is work in process? definition and meaning". businessdictionary.com. Archived from the original on 2019-12-05. Retrieved 2014-07-12.
  4. ^ "Work in Process financial definition of Work in Process". financial-dictionary.thefreedictionary.com. Retrieved 2014-07-12.
  5. ^ "Collins English Dictionary | Always Free Online". collinsdictionary.com. Retrieved 2014-07-12.
  6. ^ "Work In Progress (WIP) Definition | Investopedia". investopedia.com. Retrieved 2014-07-12.
  7. ^ "What Is Work-In-Progress (WIP)? | Finance Strategists". Finance Strategists. financestrategists.com. Retrieved 2020-11-11.
  8. ^ "W - Wage to WTO (World Trade Organisation) - Dictionary". tuition.com.hk. Retrieved 2014-07-12.
  9. ^ a b c d "What is Work in Process (WIP) Inventory & How to Calculate It". Ware2Go. 2021-08-25. Retrieved 2022-07-13.
  10. ^ "What Work-in-Progress Really Means". Investopedia. Retrieved 2022-07-13.
  11. ^ Institute, Corporate Finance. "Inventory". Corporate Finance Institute. Retrieved 2022-07-13.
  12. ^ a b "What is Work in Process (WIP) in logistics? - SCM EDU". 2019-04-23. Retrieved 2022-07-13.
  13. ^ "WIP Inventory | Advantages and Disadvantages of WIP Inventory". EDUCBA. 2020-10-26. Retrieved 2022-07-13.
  14. ^ HMRC, Business Income Manual, section 33020 - Stock: meaning of: work in progress, accessed 24 January 2018
Retrieved from "https://en.wikipedia.org/w/index.php?title=Work_in_process&oldid=1098044506"