DEFINITION: The phrase “work-in-progress” (WIP)—also known as “work-in-process”—refers to partially finished goods awaiting completion. The term is used mainly in the context of supply chain management.
WIP refers to the cost of raw materials, labor, and overhead that went into the production of items situated at different stages of the production process.
On a company’s balance sheet, WIP shows up as a component of the inventory asset account.
After completion of the production process, the costs associated with WIP are transferred to the finished goods account and, eventually, to the cost of sales.
The basic purpose of WIP is to avoid spending more money on individual nodes in the supply chain than is necessary.
ETYMOLOGY: The phrase “work-in-progress” appears to have originated during the 1950s within the context of a Japanese management movement aimed at reducing overhead and streamlining supply chain production developed by Toyota Motor Company. The movement was given the name “lean thinking” in 1988 by Hyundai Motor America president and CEO, John F. Krafcik, when he was a graduate student at MIT.
The English noun “work” is attested from around the eleventh century. It derives, via Middle English werk or work, from Old English werc or weorc. The latter is akin to Old High German werc.
The English preposition “in” derives from the same form in Middle English and in Old English. The Old English word, in turn, is akin to the same form in Old High German and in Latin. Thus, the form in in all four languages is identical to the modern English form, with the same meaning.
The English noun “progress” is attested from the fifteenth century. It derives, via Middle English, from the Latin past participle prōgressus from the deponent verb prōgredior, prōgredi, meaning “to go forth,” “to go out,” “to go forward,” “to proceed,” or “to advance.”
USAGE: The notion ofWIP refers to the flow of manufacturing costs from one location within a production supply chain to another.
The WIP balance represents all the costs of production incurred for goods upon which work has begun but not yet ended.
That is to say, the WIP is a component of a company’s balance sheet, which reflects only the value of those products that are in an intermediate stage of production.
The production costs included in WIP may represent such things as raw materials, the labor used in making goods, and allocated overhead.
However, WIP excludes the value of raw materials not yet incorporated into an item for sale, as well as the value of finished products being held in inventory pending future sales.
For example, take a plastic pail manufacturer. During the process of manufacturing pails, plastic moves from the category of raw material to that of material used in production.
Next, wages paid to the employees who the operate the molding equipment which presses the bulk plastic into the shape of pails fall into the category of labor costs.
Since the pails are not yet finished, for the time being these costs count as WIP.
Then, when the pails are finished, the costs are moved from the category of WIP to that of finished goods (both accounts are considered part of the inventory).
When the pails are finally sold, these costs are moved from the category of inventory to that of “cost of goods sold” (COGS).
In other words, an item in inventory is designated as work in progress when human labor and raw materials have been invested in it, but it is not yet classified as a finished good. That is, while some essential tasks have been completed, others remain to be done.
The classification of WIP may vary according to distinct accounting approaches which may be adopted by different companies.
Therefore, investors need to differentiate between the method a company uses to measure its work in progress and the way it handles other inventory categories. For this reason, it may not be proper to compare one company’s WIP classification with another’s.
For instance, the apportionment of overhead by two different companies might rely on factors such as labor hours versus machine hours.
WIP is recorded as an asset on the balance sheet. Thus, the conventional accounting approach involves minimizing the WIP inventory before mandatory reporting occurs. This is all the more necessary given the complexity and labor-intensive nature of estimating an inventory asset’s completion percentage.