Depending upon the context, the word WIP could mean a lot of things. But usually when one uses the word WIP, it stands for work in progress. Work can progress can allude to a number of things. In the business circle, the term work in progress usually refers to the fact that manufacturing of certain products has not been completed yet. It is a commonly used term in supply chain management or production sectors of companies. It is used to describe the incomplete or partial completion of company products or services. WIP is also used to describe the costs of the incomplete products whether it comes from its raw materials or labor involved in the production process. WIP’s are usually accounted for as assets on a company’s balance sheet. When a product is completed, these costs are then transferred to the finished goods account. As part of a company’s balance sheet, WIP’s only represent those products that are still in the process of production. Any raw material that has not yet been incorporated into the developing product is not included as part of the costs. Any product that has been completed and is being held as inventory is also not included in the list. Such items are usually kept in inventory until being made available for sale in the future.
Explaining Work In Progress(WIP)
The concept of WIP is usually used by the companies to determine and track the flow of costs in manufacturing process as it moves from one production area to the next. Any kind cost included in the production of the yet incomplete product is accounted for. These costs could include the purchasing of raw materials, the amount of labor being utilized for the manufacturing process and even overhead. For those not in the know, the term overhead in a business context is usually used to describe any costs that are necessary to support the business despite not being directly involved in the manufacturing process of the product or service. For example, costs like rent, insurance, administrative costs etc. that are necessary for managing the business. To better understand the flow of costs let’s look at an example. Consider a company that is involve din the manufacturing of plastic chairs. Here plastic is going to be the primary raw material utilized in the production process. Costs here include the purchasing of raw materials and the labor that will be involved in the production process. If the chairs are not yet completed, all the cots will be listed under the WIP banner. When the plastic chairs are finally produced, these costs will then be listed under the finished goods section. This will eventually be moved to sold goods list when the chairs are sold.
Any inventory that has had any labor involvement will be listed as WIP if its production is still incomplete. Different companies use different methods to determine to their various inventory accounts including WIP. How a company goes about measuring its inventory accounts and WIP is very important for its success. The process usually varies from company to company due to different working hours or other factors.
For determining the number of incomplete products that fall under WIP, the accountants use various methods. Usually this is calculated by considering the amount of raw material used, the amount of labor involved and any overhead charges. Cost of raw materials is usually first on the consideration list. Accountants use job casting to track the costs and profits for any specific job while process costing is used when each customer has a different job. All the data is then used for analysis and expenses are traced for tax purposes. Sometimes you may also come across another familiar term in work in process. The term work in process is usually used to describe products or services that require very short amount of time for their completion. Both terms are sometimes used interchangeably to describe any unfinished products. Once completed, the costs are then moved to finished goods section. Both costs are added to a company’s balance sheet.
From above information, it can be seen how WIP is used to describe any form of costs associated with unfinished products. These costs include raw material costs, labor costs and business overhead. Once products are completed, they are no longer filed under WIP but moved to finished products list. WIPs are important parts of any company’s balance sheet.
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