How to Deal with Work in Process in Cost Accounting
When cost accounting, as you open the door of your factory on the first day of the month, you may see partially completed goods sitting on the factory floor. Those goods are considered work in process (WIP). The goods are partially completed, so you’ve incurred some costs, but not all costs.
Your finished goods inventory affects process costing. The costing process becomes more complicated when you have inventory. Both WIP inventory and finished goods inventory may have a beginning balance. Each account may also have an ending inventory balance.
A manufacturer doesn’t usually start the month without partially completed products or end the month with all products sold. It can happen, but generally, it’s expected that manufacturing is a continuous process. So most firms always have a work in process balance (costs posted to the account).
For purposes of this discussion, the term percentage completed means work completed and costs incurred.
It’s a given that WIP at different stages has incurred different amounts of costs. Here are scenarios that may be in play:
Say your items in April beginning WIP inventory are 10 percent complete. During April, you complete them. This means that you spend the remaining 90 percent of their costs during April. Beginning inventory WIP has a different amount of costs to complete (90 percent to go) than items started during the period (100 percent to go), which are 0 percent complete and may or may not be complete when the period ends.
If you start and complete an item in April, it accumulates 100 percent of its costs of production during the month, and that’s that.
At the end of April, any partially completed items are considered ending WIP. There’s bound to be WIP, because an efficient manufacturer usually starts making new units as soon as the machines and staff free up. Your April ending inventory is also the beginning inventory for May. Say the April ending inventory has incurred 30 percent of its costs. To complete the goods in May, you need to spend another 70 percent in costs.