Work in progress

What it means

Work in progress is inventory of the company’s own making that has been through one or more operations but is not yet a finished product or a separately saleable thing. A part-built job or an unbilled service belongs here too.

It is neither finished goods nor goods bought for resale: it arises inside the company and its value cannot be copied from anywhere, because no invoice exists for it. It is measured at own cost: direct costs plus the share of overhead that relates to production.

What separates it from semi-finished products of own manufacture is that a semi-finished product has completed a defined stage and can be stored or used further, while work in progress is still in the process. What separates it from raw material is that labour and overhead have gone into it: raw material in the store is material, the same material being worked on the line is already work in progress.

How it works in practice

The balance is either tracked in the stock records all year or established only at the balance sheet date, depending on whether the company uses method A or method B. Under method B the physical count of unfinished work is the only source of the figure.

The amount of work in progress decides which year the profit on a job running across the year end lands in. The basis is a costing: without one the valuation is a guess, and a guess does not survive a tax audit.

A typical case is a web or construction project that is half done at 31 December and will be invoiced only on handover under a contract for work. We ask the client for the hours worked and the material used on the job and value the unfinished work at those costs, not at the agreed contract price.

What to watch out for

Administrative and selling overheads do not belong in own cost. Let marketing or back-office salaries in and the inventory is overstated, the company reports profit it has not earned and pays tax on it a year before the difference unwinds back into expenses.

Under method B the work-in-progress balance booked at year end has to be released back through the change in inventory at the start of the new year. Forget that and the same unfinished work is counted twice in the following year, so the profit or loss and the tax base both come out higher than they really are.