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A manufacturer can consume materials, labour and production resources throughout the month without completing every item before period-end. The costs attached to those unfinished goods do not simply disappear into expense; where the applicable inventory rules are met, they remain part of work in progress until production moves forward.
This creates a basic accounting flow:
Raw materials → Work in progress → Finished goods → Cost of goods sold
Understanding that movement is important because an incorrect WIP balance can distort inventory, production costs and reported profit. It is also important to distinguish manufacturing WIP from the way the term is sometimes used in construction and project-based businesses, where different accounting requirements may apply.
Work in progress accounting is the process of identifying, accumulating and valuing the costs of goods that have entered production but are not yet complete at the end of an accounting period.
The terms work in progress and work in process are often used interchangeably in manufacturing.
The basic production flow is:
Raw materials → WIP → Finished goods
Once the completed goods are sold, their carrying cost moves from finished-goods inventory into cost of goods sold.
The IFRS Foundation's IAS 2 Inventories guidance states that inventory cost includes costs of purchase, costs of conversion such as direct labour and production overhead, and other costs incurred in bringing inventory to its present location and condition.
For the broader principles behind material, labour and overhead allocation, see HAL's guide to cost accounting.
The same inventory can move through several accounting classifications as production advances.
The classification is based on the state of production rather than simply physical location.
A component sitting inside a factory is not necessarily WIP. If it has not yet been released or consumed in production, it may still be raw material. Conversely, an item that has gone through part of the production process can remain WIP even if it is temporarily stored while waiting for the next production stage.
The accounting records should therefore follow the underlying production status rather than relying only on where the item happens to be stored.
WIP should contain the costs that qualify as inventory costs under the applicable accounting framework.
Under IAS 2 Inventories, inventory cost includes purchase costs, conversion costs and other costs incurred in bringing inventory to its present location and condition.
In a manufacturing environment, that can include:
IAS 2 specifically excludes abnormal amounts of wasted materials, labour and other production costs. It also excludes storage costs unless they are necessary in the production process before a further stage, administrative overhead that does not contribute to bringing inventory to its present location and condition, and selling costs.
This is why simply adding every factory-related expense to WIP is not appropriate.
Production overhead also requires judgement. The fact that a cost occurs in a factory does not automatically make the full amount part of inventory. The allocation needs to follow the applicable accounting policy and inventory-cost requirements.
A useful way to understand the movement in manufacturing WIP is through a roll-forward:
Ending WIP = Beginning WIP + Production costs added − Cost transferred to finished goods
The three parts are straightforward conceptually.
Beginning WIP is the carrying value of unfinished production brought forward from the previous accounting period.
Production costs added are qualifying materials, labour, production overhead and other inventory costs added while production takes place during the period.
Cost transferred to finished goods represents the accumulated production cost of units that became complete and were moved out of WIP.
The formula reconciles the overall WIP balance. It does not, by itself, determine how much cost should be assigned to every partially completed unit. That still depends on the organisation's costing approach and the stage of production.
Assume a manufacturer begins the month with AED 50,000 of unfinished production.
During the month, it adds the following qualifying manufacturing costs:
During the same period, goods with an accumulated production cost of AED 290,000 are completed and transferred into finished-goods inventory.
The ending WIP calculation is:
AED 350,000 − AED 290,000 = AED 60,000 ending WIP
The AED 60,000 represents the accounting cost assigned to production that remains incomplete at period-end.
It does not mean the unfinished goods have a retail or expected selling value of AED 60,000. WIP is initially a cost measurement, subject to the applicable inventory valuation rules.
The accounting entries illustrate how production costs move through inventory as work progresses.
When raw materials are issued into production, a simplified entry may be:
Debit: Work in Progress
Credit: Raw Materials
Direct production labour allocated to unfinished production may be recorded conceptually as:
Debit: Work in Progress
Credit: Wages or payroll-related account
Allocated production overhead can similarly increase WIP:
Debit: Work in Progress
Credit: Production overhead or allocation account
When the goods are completed:
Debit: Finished Goods
Credit: Work in Progress
Finally, when finished goods are sold, their carrying cost moves to expense:
Debit: Cost of Goods Sold
Credit: Finished Goods
The exact account names, postings and timing depend on the company's chart of accounts, accounting system and costing method. IFRS does not prescribe these exact journal-entry labels.
The underlying economic movement is what matters:
Production cost accumulates in WIP → completed cost moves to finished goods → sold inventory becomes cost of goods sold
Under IAS 2, inventories are measured at the lower of cost and net realisable value.
Cost is often the easier part to understand for completed goods. For WIP, the challenge is that production is incomplete.
Suppose all of the material required for an item has already been added, but conversion work is only 40% complete. That unfinished item may contain most of its eventual direct-material cost while only part of the labour and production-overhead cost has been incurred or allocated.
The method used to determine WIP cost can depend on the production environment. Businesses may use job costing for identifiable custom orders, process costing for continuous production, or standard costs where an appropriate standard-costing system is maintained.
HAL's guide to standard costing explains that method and variance analysis in greater detail.
WIP also needs to be considered against net realisable value. IAS 2 defines NRV as the estimated selling price in the ordinary course of business less estimated completion costs and the estimated costs necessary to make the sale.
This matters when unfinished production becomes damaged, obsolete, commercially unattractive or significantly more expensive to complete than originally expected.
The production environment affects how businesses accumulate and assign costs to unfinished work.
Job costing can work well when each job is separately identifiable. A manufacturer producing a custom machine can accumulate material, labour and overhead against that particular production order.
Process costing is more suited to environments where large numbers of similar units move through the same stages. Food processing, chemicals and other continuous production environments are common examples.
The important point is not that one method is universally better. The costing system needs to represent how production actually occurs and provide a reasonable basis for assigning cost between completed and incomplete units.
Production cost changes classification as goods move through the manufacturing and sales cycle.
The same underlying material or labour cost can therefore move through several accounts without becoming a new cost each time.
For example:
Raw-material cost → WIP → Finished goods → Cost of goods sold
The accounting classification changes because the economic status of the inventory changes.
This movement is also why errors in WIP can affect reported profit. If costs that should remain in unfinished production are expensed too early, profit may be understated in that period. If expenses that should not qualify as inventory are incorrectly capitalised in WIP, profit may be overstated.
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The word “WIP” is widely used outside manufacturing, but it does not always describe the same accounting asset.
In manufacturing, IAS 2 applies to inventory that is in the process of production for sale. Costs accumulate in unfinished inventory before moving into finished goods.
Project-based and construction businesses may also informally use WIP to describe work performed but not yet invoiced, costs accumulated on an incomplete contract, or the difference between project progress and customer billing.
Those situations require a different accounting analysis.
Under IFRS 15 Revenue from Contracts with Customers, revenue is recognised when or as the entity satisfies its performance obligations. A performance obligation may be satisfied at a point in time or, when the relevant criteria are met, over time. For obligations satisfied over time, the entity uses an appropriate measure of progress.
That can result in accounting for contract assets, contract liabilities or other contract-related balances rather than simply treating accumulated project spending as manufacturing WIP inventory.
The practical rule is important:
Do not automatically apply the manufacturing WIP formula to construction contracts, consulting engagements or other customer projects simply because the business calls unfinished work “WIP.”
The contractual arrangement and applicable accounting standard need to be assessed first.
WIP can represent a significant asset for manufacturers, so incorrect balances can affect both the balance sheet and the income statement.
If too little production cost is carried in WIP, too much cost may be recognised as expense prematurely. If too much cost is capitalised, inventory and profit can be overstated.
WIP data is also useful operationally. Growing unfinished inventory may show that significant materials, labour and overhead are tied up before products reach a saleable condition.
That does not mean high WIP is always undesirable. Some production environments naturally require long processing periods or multiple production stages.
The more useful question is whether the level and age of WIP are consistent with the production process and whether the accounting balance agrees with what is actually happening on the factory floor.
A common mistake is treating every factory expense as part of WIP. IAS 2 draws an important distinction between qualifying production costs and expenses such as abnormal waste, unnecessary storage, unrelated administration and selling costs.
Businesses can also leave completed products classified as WIP after they have moved into finished-goods status. The opposite error occurs when incomplete goods are transferred out too early.
Other issues include using selling prices instead of production cost, failing to consider the percentage of completion of unfinished units, and carrying outdated standard costs without analysing significant variances.
Duplicate costing is another risk. If costs remain in WIP after the related production has already been transferred to finished goods, the same production value may effectively appear in both balances.
Old WIP also deserves attention. A large WIP balance is not automatically wrong, but unfinished production that remains open for an unusually long period may indicate a production, costing or valuation issue that should be investigated.
✓ Beginning WIP agrees with the prior-period closing balance
✓ Open production orders have been reviewed
✓ Materials consumed in production are recorded
✓ Direct labour allocations have been reviewed
✓ Production-overhead allocations have been reviewed
✓ Completed items have been transferred out of WIP
✓ Incomplete production has been identified correctly
✓ Duplicate costs have been checked
✓ Abnormal waste has been separated where applicable
✓ Damaged or obsolete WIP has been reviewed
✓ WIP cost records reconcile with production information
✓ WIP balances reconcile with accounting records
✓ Lower-of-cost-and-NRV considerations have been reviewed
✓ Old or unusual WIP balances have been investigated
✓ Customer-contract/project balances have been assessed separately from manufacturing WIP
Period-end review should connect the accounting records with production reality. A mathematically balanced WIP account can still be wrong if completed goods remain open, costs were allocated to the wrong production order or production records do not support the accounting balance.
WIP becomes increasingly difficult to manage when production records, material usage and accounting information sit in separate systems.
HAL Manufacturing documents production scheduling and tracking, raw-material and finished-goods inventory visibility, material-usage information and production-cost breakdowns involving labour, materials and overhead. It also connects manufacturing activity with wider business functions.
HAL Accounting provides the connected financial-record and reporting environment on the accounting side.
Bringing production and accounting information closer together can reduce the manual reconciliation required to understand what has been consumed, what has been completed and what value remains in unfinished production.
The software still depends on appropriate costing policies and accounting judgement. An ERP system should not be treated as automatically determining the correct IFRS treatment, net realisable value, overhead allocation or revenue-recognition method.
Manufacturing WIP sits in the middle of a straightforward accounting flow:
Raw materials → Work in progress → Finished goods → Cost of goods sold
Getting that middle stage right requires more than adding up factory costs. The business needs to identify what production remains incomplete, determine which costs legitimately belong to it, transfer completed production at the right time and consider whether the carrying amount remains recoverable.
HAL Manufacturing and HAL Accounting can connect production, inventory and financial information within a wider ERP workflow. Businesses looking to bring these records together can book a HAL demo.
In a manufacturing context, work in progress refers to inventory that has entered production but is not yet complete at the reporting date. It can contain qualifying materials, labour, production overhead and other appropriate production costs.
Manufacturing WIP that meets the inventory definition is generally carried as an inventory asset while production remains incomplete. Its carrying amount eventually moves to finished goods and then to expense when the related goods are sold, subject to applicable valuation requirements.
A common roll-forward is:
Ending WIP = Beginning WIP + Production costs added − Cost of completed production transferred to finished goods
The business still needs a suitable costing method to determine the value assigned to incomplete units.
Qualifying costs can include direct materials, direct production labour, allocated production overhead and other costs incurred in bringing inventory to its present location and condition. IAS 2 excludes items such as abnormal waste, certain storage costs, unrelated administrative overhead and selling costs.
WIP represents incomplete production. Finished goods have completed the manufacturing process but have not yet been sold.
The terms are commonly used interchangeably in manufacturing accounting, although individual businesses or industries may prefer one term over the other.
Not necessarily. Manufacturing WIP can fall within IAS 2 inventory accounting, while construction or customer-project balances may require analysis under IFRS 15 and other applicable requirements. The informal use of the word “WIP” does not determine the accounting treatment.
