Work in process
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Work in process, work in progress, (WIP) goods in process, or in-process inventory are a company's partially finished goods waiting for completion and eventual sale or the value of these items. These items are either just being fabricated or waiting for further processing in a queue or a buffer storage. The term is used in production and supply chain management.
Optimal production management aims to minimize work in process. Work in process requires storage space, represents bound capital not available for investment and carries an inherent risk of earlier expiration of shelf life of the products. A queue leading to a production step shows that the step is well buffered for shortage in supplies from preceding steps, but may also indicate insufficient capacity to process the output from these preceding steps.
Just-in-time (acronym: JIT) production is a concept to reduce work in process with respect to a continuous configuration of product. Just in sequence (JIS) is a similar concept with respect to a scheduled variety in sequence of configurations for products.
Barcode and RFID identification can be used to identify work items in process flow. For locating the products additional requirements must be considered to ensure not only presence of work items, but also knowledge of the whereabouts of these items. This is a mandatory condition in flexible production lines with paralleled work positions for single steps of production.
Sometimes, outside of a production and construction context "Work in process" is used erroneously where the status "Work in Progress" would be correctly used to describe more broadly work that is not yet a final product.
WIP in construction projects
Work-In-Process in construction accounting identifies the value of construction projects which are currently being worked on by the construction firm. To properly account for each project, FOUR values are needed for each project at the end of any given month (or period):
- the Sales Price (excluding sales tax) for the project,
- the total Cost Estimate for the project,
- the Costs-To-Date,
- the Billed-To-Date.
By taking the Costs-To-Date divided by the Cost Estimate, the "percentage complete" for the project is calculated. For example:
- Assume a project is estimated to cost $70,000 by the time the work is complete
- Assume at the end of December, $35,000 has been spent to date for the project
- $35,000 divided by $70,000 is 50%, therefore, the project can be considered 50% complete at December 31.
Calculation of the Percentage complete is a valuable tool in determining how much the client should be billed - it is important that Billings, and even collection of these billings, are greater than the costs expended to do the work. This ensures that the client is directly funding the construction work, and that the contracting firm minimizes borrowing on behalf of the client. Using the example above, suppose the following:
- the Sales Price of the project is $100,000
- $100,000 times 50% (the level of completion) = $50,000
Therefore, for the period ending December 31, the client should be invoiced at least $50,000 to properly fund the work...