Work in progress (WIP) is the part of stocks that is currently being worked on.
WIP is no longer raw materials because it has undergone some processing. It is also not yet finished goods because more work has to be done to put it into the state in which it would normally be sold.
Like any other stock, WIP is valued at the lower of:
- Cost: this is the cost of the raw materials and the processing. This could be any of FIFO, LIFO, replacement cost, average cost or specific cost.
- Net realisable value: the price for which it could be sold less costs involved in selling.
The value of WIP includes the cost of processing in order to match costs with revenues in accordance with the accrual principle.
If the value of stocks falls, an unrealised loss has been made and this needs to be reflected in the accounts.
The valuation of work in progress does depend on the methods of costing employed by a company: companies have a lot of discretion about which costs are allocated to the cost of goods they make, and which are simply taken as expenses in the period.
The rules for calculating WIP for tax purposes are (for obvious reasons) more rigid than those for financial reporting purposes.