Definition
Work in progress, or WIP, is the cost of products that have started production but are not yet finished at the reporting date. It includes the direct materials issued, the direct labour spent and the production overhead absorbed so far, and it is reported as part of inventories on the balance sheet until the goods are completed.
How it works
WIP is a staging account. Materials issued to production, labour booked to an order and overhead absorbed at the predetermined rate are debited to it. When units are finished, their cost moves out of WIP into finished goods, and later into cost of sales when they are sold.
At period end, whatever is still in WIP must be measured. In job order costing each open order carries its own accumulated cost; in process costing the cost is split between finished units and partly finished units using equivalent units.
A large or growing WIP balance can signal stuck orders, unrecorded completions or overhead absorbed on orders that never close. In Ledgeriano production orders collect material issues, labour and overhead, post receipts of finished goods, and close with variances so WIP clears properly.
Formula
Ending WIP = Opening WIP + Materials + Labour + Overhead absorbed - Cost of goods completed
Example: one production order
An order for 50 tables receives materials of 6,000, labour of 2,500 and overhead absorbed of 1,500. At month end 30 tables are finished at a standard cost of 190 each (5,700).
WIP is 6,000 + 2,500 + 1,500 - 5,700 = 4,300, which stays on the balance sheet until the remaining 20 tables are finished or the order is closed.