What account is credited when overhead cost is applied to work in process?

Work in process is goods in production that have not yet been completed. These goods are situated between raw materials and finished goods in the production process flow.

Inventory in this classification typically involves the full amount of raw materials needed for a product, since that is usually included in the product at the beginning of the manufacturing process. During production, the cost of direct labor and overhead is added in proportion to the amount of work done. From the perspective of valuation, a WIP item is more valuable than a raw materials item (since processing costs have been added), but is not as valuable as a finished goods item (to which the full set of processing costs have already been added).

In prolonged production operations, there may be a considerable amount of investment in work in process. Conversely, the production of some products occupies such a brief period of time that the accounting staff does not bother to track WIP at all; instead, the items in production are considered to still be in the raw materials inventory. In this latter case, inventory essentially shifts directly from the raw materials inventory to the finished goods inventory, with no separate work in process accounting at all.

Work in progress accounting involves tracking the amount of WIP in inventory at the end of an accounting period and assigning a cost to it for inventory valuation purposes, based on the percentage of completion of the WIP items.

Accounting for Work in Process

WIP accounting can be incredibly complex for large projects that are in process over many months. In those situations, we use job costing to assign individual costs to projects.

In situations where there are many similar products in process, it is more common to follow these steps to account for work in process inventory:

1. Assign raw materials. We assume that all raw materials have been assigned to work in process as soon as the work begins. This is reasonable, since many types of production involve kitting all of the materials needed to construct a product and delivering them to the manufacturing area at one time.

2. Compile labor costs. The production staff can track the time it works on each product, which is then assigned to the work in process. However, this is painfully time-consuming, so a better approach is to determine the stage of completion of each item in production, and assign a standard labor cost to it based on the stage of completion. This information comes from labor routings that detail the standard amount of labor needed at each stage of the production process.

3. Assign overhead. If overhead is assigned based on labor hours, then it is assigned based on the labor information compiled in the preceding step. If overhead is assigned based on some other allocation methodology, then the basis of allocation (such as machine hours used) must first be compiled.

4. Record the entry. This journal entry involves shifting raw materials from the raw materials inventory account to the work in process inventory account, shifting direct labor expense into the work in process inventory account, and shifting factory overhead from the overhead cost pool to the WIP inventory account.

It is much easier to use standard costs for work in process accounting. Actual costs are difficult to trace to individual units of production, unless job costing is being used. However, standard costs are not as precise as actual costs, especially if the standard costs turn out to be inaccurate, or there are significant production inefficiencies beyond what were anticipated in the standard costs.

The general theme of WIP accounting is to always use the simplest method that the company can convince its auditors to accept, on the grounds that a complex costing methodology will require an inordinate amount of time by the accounting staff, which in turn interferes with the time required to close the books at the end of each month.

Auditors are more likely to engage in a close examination of the accounting records for work-in-process when the ending valuation in this area is quite high, which can result in increased audit fees. Consequently, it pays to flush as much WIP into finished goods as possible prior to the end of the fiscal year.

How to Backflush Work in Process

It may be possible to use backflushing to estimate the cost of the materials currently located in the work in process area. This involves multiplying the number of units in process by the bill of materials for those units. On the assumption that all materials are added at the front of the production process, this calculation may yield a reasonably accurate estimate of materials in use, especially if the bills of material are very accurate.

Terms Similar to Work in Process

Work in process accounting is also known as work in progress accounting. Work is process is also known as work in progress or WIP.

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