Work in Progress (WIP) Accounting Journal Entries

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  • 0:03 Inventory Classifications
  • 1:12 Inventory Costs
  • 3:30 Other Considerations
  • 4:01 Lesson Summary
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Lesson Transcript
Instructor: Mark Koscinski

Mark has a doctorate from Drew University and teaches accounting classes. He is a writer, editor and has experience in public and private accounting.

In this lesson, you'll learn about three types of inventory, but most specifically work-in-progress inventory. You'll also learn about inventory costs captured during the production process.

Inventory Classifications

Manufacturing companies have three types of inventory: raw material, work-in-progress (also known as work-in-process), and finished goods. Inventory is identified by where it is in the production process. Raw material inventory has not yet been put into production. It can take many forms, depending on the nature of the business. In a toy company, it could include the plastic used to manufacture chess or checker pieces or the cardboard used to make board game boxes. Finished goods inventory includes all inventory units completed prior to the balance sheet date that are ready and available for sale. The inventory exists in its final form.

On the other hand, work-in-progress inventory (WIP) is inventory in the production process not completed as of the balance sheet date. A quintessential example of work-in-progress inventory is uncompleted toys on an assembly line on the last day of the company's fiscal year. Costs have been incurred in the production, and they must be accounted for properly.

Inventory Costs

Inventory accounting considers three main cost components. The first is raw material, the second is labor cost, and the third is overhead. Examples of overhead costs include overtime premiums, factory foremen salaries, and factory utility costs.

Each item manufactured typically has a bill of material that specifies how much and what raw material needs to be used to manufacture the item. As $1,000 of raw material is put into production, the following accounting journal entry to record raw material is made:

Dr. Work-in-process inventory 1,000
Cr. Raw material inventory 1,000

To account for raw material placed into the production process

The raw material has now become work-in-process inventory. To introduce the raw material into the production process, labor expense is usually incurred. This could include everything from the person operating the manufacturing equipment to the person on the forklift moving the material to the production line. The accounting journal entry to record direct labor of $2,000 looks like this:

Dr. Work-in-process inventory 2,000
Cr. Direct labor expense 2,000

To record the direct labor incurred to put material into production

Finally, inventory cost must include factory overhead. Factory overhead is often expressed as a multiple of labor cost. For instance, for every $1 of labor cost, there may be $3 of overhead cost. Therefore, for every dollar of direct labor recorded in inventory cost, there will be $3 of overhead included in the cost of a product. Factory overhead absorbed is an account where the estimated factory overhead is accumulated.

The accounting journal entry to record factory overhead of $6,000 appears like this:

Dr. Work-in-process inventory 6,000
Cr. Factory overhead absorbed 6,000

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