How does work in progress effect the balance sheet?

Written by osmond vitez
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Work-in-Progress is an inventory item found in most manufacturers' financial reporting. It is an important piece of the manufacturing process because cost overruns will usually occur in this stage of production. Work-in-Progress is also found in other industries or professions, but not as an inventory item.

Resources for reporting Work-in-Progress come from the Generally Accepted Accounting Principles (GAAP).

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The Facts

The Financial Accounting Standards Boards (FASB), currently the issuer of U.S. accounting standards, lists Work-in-Progress (WIP) as an inventory item. Their definition of inventory includes, "The aggregate of those items of tangible personal property that have any of the following characteristics...In process of production for such sale" (asc.fasb.org). An exception to this definition is WIP that relates to a long-term, depreciable asset, which FASB does not consider regular inventory.

Types of Work-in-Progress

WIP is usually found in industries that manufacture goods to be sold at the wholesale or consumer level. Major manufacturers of durable goods usually have larger quantities of WIP since their production processes are lengthier and require more time to create finished products.

WIP is also found in non-manufacturing industries, such as legal or accounting practices. These professions use billable hour rates, so keeping track of how many hours have been used on assignments is valuable information.

Balance Sheet Reporting

When reporting WIP on the balance sheet, the number is included in the inventory line under Current Assets. Using Ford Motor Company as an example, it reports only one line of inventory dollars on its publicly released balance sheet. Included in this amount will be the finished goods, WIP and raw materials currently on hand.

Internal WIP Reporting

Most manufacturers track WIP internally using reports generated from their manufacturing or accounting systems. These reports will list the amount of labour hours and raw materials used for each item or batch currently in WIP. The total of these reports will be added to the company's overall inventory when the balance sheet is produced at month-end or year-end.

Other Types of WIP Reporting

Some industries and professions use WIP to track current projects, but these projects are usually not inventory items. WIP is useful to track expenses for project planning or consulting, especially where a budget is in place to prevent cost overruns. If the consulting is part of a non-current asset, then the cost is added to the overall cost depreciable asset.

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