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Work in Progress

What is Work in Progress?

In accounting, a work in progress (WIP) account is an inventory account that includes goods that are in the process of being produced but are not yet finished. This account represents the costs of resources used but not yet turned into completed products. Also refer to the work in progress account as work in process. It is one of the inventory accounts commonly used to track the flow of costs in a production process. Other common inventory accounts include raw materials and finished goods. Inventory accounts are reported as current assets on the company’s balance sheet. Use these accounts for internal analysis as well as external financial reporting.

Cost of Goods Manufactured Calculation

Compute the cost of goods manufactured in a fiscal period using cost data relating to the work in progress account. Simply start with the beginning balance of the work in progress account. Then add the costs of resources transferred into the account during the relevant period. Finally, subtract the ending balance of the work in progress account for that period. As a result, you will get the cost of goods manufactured for that period.

Cost of Goods Manufactured = Beginning Balance + Transfers In – Ending Balance

Flow of Costs

Costs that are represented in the work in progress account include direct materials, direct labor, and manufacturing overhead. As work proceeds in a production process, costs flow from the raw materials inventory account, into the work in progress inventory account, and then into the finished goods account. Represent all of these costs as current assets in inventory accounts on the balance sheet. Once you sell the finished goods, transfer the associated costs to the cost of goods sold account on the income statement.

Raw Materials → Work in Process → Finished Goods → Cost of Goods Sold

Just-in-Time and WIP

The work in progress account represents a cost to the company. These costs are storage costs and obsolescence costs. But holding inventory is costly – it takes up storage space and requires supervisory monitoring. The longer a company hold goods in storage, the higher the risk of these goods becoming obsolete. Therefore, they will decrease in value. Just-in-time inventory system strives to minimize the amount of inventory held in the work in progress account. Therefore, it reduces the costs associated with holding inventory.

work in progress

Source:

Hilton, Ronald W., Michael W. Maher, Frank H. Selto. “Cost Management Strategies for Business Decision”, Mcgraw-Hill Irwin, New York, NY, 2008.

See Also:
Balance Sheet
Working Capital
Working Capital Analysis
Income Statement
Throughput
Inventory Shrinkage

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Inventory Shrinkage

Inventory Shrinkage Definition

Inventory shrinkage means that, somewhere along the line, there is a drop in product numbers from the time of manufacture to the time of sale. Clearly, this is a bad thing for both the consumer and the producer. On the producer side of things, the inventory shrinkage factor causes an uptick in product costs as a result of the producers needs to keep profits high. Because of the uptick in product costs, this means that prices on the products are going to go up as a consequence. Furthermore, because of the increase in prices by the producers, the consumers are adversely affected as well. More obviously, the consumers have to pay higher prices for the products than they would have without the shrinkage of inventory. The shrinkage of inventory is a problem because it causes an economic loss as a whole for the entire market.

Inventory Shrinkage Problems

Now that we know what inventory shrinkage causes, as well as what it is as a whole, what causes inventory shrinkage? If one looks at the regular flow of production for a business, products go from Work in Progress, to Finished Goods Inventory, to Sold Products. In a perfect world, there shouldn’t be a point in this process where products just vanish (causing inventory shrinkage). Therefore, one of the likely conclusions settled upon is that there is some sort of malpractice involved with the act.

One of the main forms of inventory shrinkage comes as result of employee theft. That is, employees are taking finished goods out of the finished goods inventory and stealing them. Obviously, the producers/retailers are receiving no profits from these products. Similarly, another inventory shrinkage cause comes as a result of shoplifters. Like employee theft, the outside stealing of company products leads to shrinkage in inventory and a drop in profits. However, inventory shrinkage is caused by more than just theft. Inventory shrinkage reports have shown that paperwork and clerical errors are also a known causer of inventory shrinkage. Even more simply, shipping problems and misplaced inventory in general are both known to be causes.

Inventory Shrinkage Internal Control

To put a leash on the amount of inventory shrinkage caused by employee theft and stealing, a retailer should impose extra security measures. This include guards, cameras, fences. However, you can only cure paperwork errors and mistakes by careful attention to details. A manager should strive to maintain a mantra of efficient internal control. Cut down on internal errors that lead to inventory shrinkage. As a result, profits will rise while prices go down for consumers.

Instead of allowing a weakness in your company to continue, check out our free Internal Analysis whitepaper to assist your leadership decisions.

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