Work in process
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Work in process (WIP), 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.
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.
In the United Kingdom, HMRC has no specific definition of "work in process", but three different types of uncompleted items are identified for tax purposes:
- manufactured products,
- contracts for services, and
- construction contracts.
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