understand and make adjustments for work in progress
5.5 Manufacturing Accounts – Work in Progress (WIP)
Imagine a factory as a giant pizza oven. While the pizza is baking, it’s not finished yet – it’s still “in progress.” In accounting, that unfinished product is called Work in Progress (WIP). This section explains how to track WIP and adjust it at the end of the accounting period.
What is WIP?
WIP includes all the costs that have been added to a product but not yet finished. These costs are:
- Direct materials
- Direct labour
- Manufacturing overhead (e.g., electricity, depreciation)
Think of it as the “ingredients” that are still being mixed before the final pizza is ready.
Why Adjust WIP?
At the end of a period, some products are still unfinished. We need to move the cost of those unfinished products from the WIP account to the Cost of Goods Sold (COGS) or Finished Goods account, depending on the stage of completion.
This adjustment ensures that the financial statements reflect the true cost of goods produced during the period.
Step‑by‑Step Adjustment
- Determine the cost of WIP at the start of the period.
- Add total manufacturing costs incurred during the period.
- Subtract the cost of WIP at the end of the period.
- The result is the cost of goods manufactured (COGM).
- Transfer the COGM to the Finished Goods account.
The journal entry looks like this:
| Account | Debit | Credit |
|---|---|---|
| Finished Goods | $COGM | — |
| Work in Progress | — | $COGM |
Example Calculation
Let’s walk through a quick example.
| Item | Amount ($) |
|---|---|
| Opening WIP | 12,000 |
| Manufacturing costs incurred | 35,000 |
| Closing WIP | 10,000 |
| COGM | $37,000 |
Calculation:
$COGM = Opening\ WIP + Manufacturing\ Costs - Closing\ WIP$
$COGM = 12,000 + 35,000 - 10,000 = 37,000$
Exam Tips 📚
Tip 1: Always remember the flow: Opening WIP → Add Costs → Subtract Closing WIP → COGM → Finished Goods.
Tip 2: Check the wording of the question. If it asks for “cost of goods manufactured,” you need to calculate COGM. If it asks for “cost of goods sold,” you’ll need to add the opening Finished Goods and subtract the closing Finished Goods.
Tip 3: Use the formula in your answer: $COGM = Opening\ WIP + Manufacturing\ Costs - Closing\ WIP$.
Tip 4: When in doubt, show the journal entry. It demonstrates you understand the accounting treatment.
Tip 5: Practice with different numbers. The more you calculate, the quicker you’ll spot the pattern. 🚀
Revision
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