Work-in-progress
Work-in-progress is the accumulated cost of partially completed units still on the production floor. Recognised as a current asset, it is transferred to finished goods inventory once manufacturing is complete.
See it move
Manufacturing cost moves through three inventory accounts before it reaches the income statement. Materials issued from raw materials, plus direct labour and overhead applied, accumulate in work-in-progress. Once a unit is complete, its full cost transfers to finished goods; once sold, that cost becomes cost of goods sold. A WIP balance rising faster than throughput points to a bottleneck on the production floor.
The formula
Variables
- work-in-progress balance at the start of the period (€)
- direct materials charged to production during the period (€)
- direct labour charged to production during the period (€)
- manufacturing overhead absorbed during the period (€)
- cost of goods completed and transferred to finished goods inventory (€)
The WIP account is a holding account for all production costs until units are finished. A rising closing balance relative to throughput may indicate a production bottleneck.
Check yourself
A toy factory starts 500 units in October. By 31 October all units have received their full direct materials allowance of €16 per completed unit, but only 50% of their conversion costs of €24 per completed unit. No units are complete. What is the correct work-in-progress balance on 31 October?