What Is a WIP Account?
Any business that provides manufacturing, or a service that may not be completed in one accounting period, should make use of a work in process (WIP) account to correctly allow for raw materials or labor that is in transit, or in the process of being converted from a raw material to a finished product. The WIP applies mainly to businesses that are in continuous production of product, and not businesses that make product to order.
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Service Work
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Work in process is an inventory at its simplest form. It accounts for work that has been done by laborers in a factory, but that has not been paid for by a customer at this point, because the product is not completed. WIP also applies to an automotive shop that carries work over from one month to another, particularly shops that apply technician's cost of labor on a per-job basis. If you have paid a technician for work done on a job, but you are waiting for parts to complete the repair, the technician's hours that you paid for will be billed upon completion, and are an asset to the business.
Manufacturing Products
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In manufacturing, particularly with continuous manufacturing processes such as producing a consumer item, WIP accounts for units that have been built, but have not been sold. The materials that have been paid for, and were in the inventory of raw materials, may be halfway through the process. This would apply to grapes that a winery purchased to make wine. If the grapes are in process, or aging, they should not be inventoried as grapes, or raw materials. They would be inventoried as work (or wine) in process, and would be costed with the labor that has been put into the process to show a value of the WIP.
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Uses of WIP
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WIP is used in accrual accounting to accurately reflect business expenses for the accounting period. If you are gearing up for a big production season, particularly if your business enjoys a seasonal spike in business, you may increase production many months before you sell the product. If your product takes a long time to manufacture, or you need to wait for components, you do not want to charge all of the material and labor out to expenses in the period before the product is sold. This would inflate expenses and reduce profit during those times, and cause profits to be extremely inflated during the seasonal sales.
End-of-Period Entries
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Work in process should be reconciled and corrected each accounting period. If you produce financial reports monthly, this needs to be part of your end-of-month reporting, particularly if you have a service business. A homebuilder should make sure that all of the labor hours he has paid to carpenters building homes that are in process are placed in a WIP account. The builder may even have one WIP account for each home in process. An automotive shop would want to make sure that all flat-rate hours billed by technicians are posted correctly to the open repair orders to be certain that the WIP is accurate for correct accounting.
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