At the end of any financial period, certain goods in every manufacturing concern have been partially processed. As such, they are no longer raw materials. However, at the same time, they are not fully processed and cannot be called finished goods. Such goods are called work-in-progress, unfinished goods, or work-in-process. If the production cycle of a factory is relatively short, the value of work-in-progress at the end of the year may be small and can be safely ignored when preparing the manufacturing statement. However, some large factories have long production cycles. At any given moment, the value of their work-in-progress may add up to a large amount. In these cases, work-in-process should be properly accounted for in the manufacturing statement. It is important to note that the issue of recognizing work-in-progress arises twice in a financial year: once at the beginning and again at the end. There is generally no question of the purchase or sale of work-in-process.
Work-in-Process (WIP) FAQs
The completed value of the work done on the stock in hand at the beginning of a period will be written off to finished products as it passes through each stage of production. The remaining cost of raw materials will be added to each following period's work-in-process until all materials are finished.
It may appear difficult to estimate the value of the work done in the period, but this is because we have not yet found a way to measure "work." At this point, it seems a bit easier to try to calculate how much finished materials were actually used in the period.
Some plants might get allowances, like obsolescent plant allowance or onerous plant allowance, but it is not typical to get work-in-process.
Let's say Company XYZ has work-in-process at the end of year 10,000 units which it started working on in years 5 and 6. The value of each unit is $20. The total cost of all materials used to make Year 10,000 units is $500.
The main issue is that they cannot be handled in the same way as finished goods. Thus, it becomes necessary to adjust the manufacturing statement in some way, in order to calculate work-in-process at each stage. Also, another complication arises in trying to decide when to stop calculating work-in-process, which could be referred to as the problem of obsolescence.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
