Work in Progress (WIP) refers to goods that are partially completed during the manufacturing process. The accounting for WIP involves tracking the costs associated with the production of goods that are not yet finished. This includes direct materials, direct labor, and manufacturing overhead.
Example 1: Recording Direct Materials Used in Production
A manufacturing company uses $15,000 worth of raw materials for products that are partially completed in July 2024.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 07-31-2024 | Work in Progress (WIP) | 15,000 | |
| 07-31-2024 | To Raw Materials Inventory | 15,000 |
Explanation:
- Work in Progress (WIP) will debited to reflect the cost of raw materials used in production.
- Raw Materials Inventory will credited to decrease the inventory of raw materials.
Example 2: Recording Direct Labor Costs
The company incurs $10,000 in direct labor costs for workers who are manufacturing products that are still in progress in July 2024.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 07-31-2024 | Work in Progress (WIP) | 10,000 | |
| 07-31-2024 | To Wages Payable | 10,000 |
Explanation:
- Work in Progress (WIP) will debited to account for the labor costs associated with partially completed products.
- Wages Payable will credited to recognize the liability for wages owed to workers.
Example 3: Allocating Manufacturing Overhead
The company applies $5,000 of manufacturing overhead to WIP based on an overhead allocation rate.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 07-31-2024 | Work in Progress (WIP) | 5,000 | |
| 07-31-2024 | To Manufacturing Overhead | 5,000 |
Explanation:
- Work in Progress (WIP) will debited to allocate manufacturing overhead costs to the partially completed goods.
- Manufacturing Overhead will credited to reduce the overhead account.
Example 4: Transferring Completed Goods to Finished Goods Inventory
At the end of August 2024, products with a total cost of $25,000 are completed and transferred from WIP to Finished Goods Inventory.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-31-2024 | Finished Goods Inventory | 25,000 | |
| 08-31-2024 | To Work in Progress (WIP) | 25,000 |
Explanation:
- Finished Goods Inventory will debited to record the transfer of completed products from WIP.
- Work in Progress (WIP) will credited to reduce the WIP account as the goods are now completed.
Example 5: Adjusting WIP for Over/Under-Applied Overhead
At the end of the year, the company finds that $500 of manufacturing overhead was over-applied to WIP.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Manufacturing Overhead | 500 | |
| 12-31-2024 | To Work in Progress (WIP) | 500 |
Explanation:
- Manufacturing Overhead will debited to adjust for the over-applied overhead.
- Work in Progress (WIP) will credited to reduce the WIP balance by the over-applied amount.
These journal entries illustrate how WIP is tracked through the different stages of production, including the application of direct materials, direct labor, and overhead. Proper accounting for WIP ensures accurate financial reporting of inventory and cost of goods sold.