Work in progress (WIP) represents goods or services that are partially completed at the balance sheet date. The business has incurred costs on these items, but they are not yet finished, delivered, or invoiced to the customer. WIP sits on the balance sheet as a current asset, forming part of the overall stock (inventory) figure.
For a manufacturer, WIP is products that are part-way through the production process. For a service business, WIP is time and costs incurred on client projects that have not yet been billed.
WIP on the Balance Sheet
Stock on a UK balance sheet is typically broken down into three categories:
| Stock Category | Description | Example |
|---|---|---|
| Raw materials | Materials purchased but not yet used in production | Steel, timber, electronic components |
| Work in progress | Partially completed goods or unbilled services | Half-assembled machinery, unbilled consulting hours |
| Finished goods | Completed goods awaiting sale or dispatch | Packaged products in the warehouse |
Under the Companies Act 2006 balance sheet formats, stock is a line item within current assets. The notes to the accounts should disclose the breakdown between raw materials, WIP, and finished goods if material.
How WIP is Valued
Manufacturing Businesses
For manufacturers, WIP is valued at the cost of production incurred to date. Under FRS 102 Section 13 (Inventories), this includes:
| Cost Element | Included in WIP? | Example |
|---|---|---|
| Raw materials consumed | Yes | Steel used in a partially built frame |
| Direct labour | Yes | Production wages for time spent on the item |
| Production overheads | Yes (proportionate share) | Factory rent, utilities, machine depreciation |
| Administrative overheads | No | Office rent, management salaries |
| Selling and distribution costs | No | Marketing, delivery costs |
The formula is:
WIP Value = Direct Materials + Direct Labour + Attributable Production Overheads
Worked Example: Manufacturing WIP
A furniture manufacturer has 50 tables in various stages of completion at the year end:
| Cost Element | Per Table (£) | 50 Tables (£) |
|---|---|---|
| Timber and materials | 80 | 4,000 |
| Direct labour (average 60% complete) | 45 | 2,250 |
| Production overheads (60% complete) | 30 | 1,500 |
| Total WIP value | 155 | 7,750 |
The 60% completion reflects that, on average, each table has received 60% of the labour and overhead required to finish it. Materials may be 100% allocated at the start of production.
Service Businesses
For service businesses such as accountancy firms, consultancies, solicitors and agencies, WIP represents unbilled time and costs on client engagements:
| Cost Element | Example |
|---|---|
| Staff time (at cost, not billing rate) | 20 hours of consultant time at £35/hour cost = £700 |
| Direct expenses | Travel, printing, third-party costs incurred for the client |
| Attributable overheads | Proportionate share of office costs related to delivery |
Service WIP should not be valued at the billing rate. FRS 102 requires WIP to be measured at the lower of cost and estimated selling price less costs to complete and sell. Profit is only recognised when the work is invoiced (or under stage-of-completion accounting for long-term contracts).
Long-Term Contracts
For contracts spanning more than one accounting period (common in construction, engineering, and large IT projects), FRS 102 Section 23 (Revenue) allows revenue and profit to be recognised on a stage-of-completion basis. This means:
- Revenue is recognised proportionally as work is performed
- Costs incurred are matched against the revenue recognised
- The balance sheet shows amounts due from customers (an asset) or amounts due to customers (a liability) rather than traditional WIP
WIP and the Income Statement
WIP directly affects the cost of goods sold calculation:
Cost of Goods Sold = Opening Stock + Production Costs - Closing Stock
Where stock includes raw materials, WIP, and finished goods.
| Item | £ |
|---|---|
| Opening WIP | 12,000 |
| Production costs incurred during the year | 340,000 |
| Less: closing WIP | (15,000) |
| Cost of completed goods | 337,000 |
If closing WIP is higher than opening WIP, it means more costs are being carried forward on the balance sheet and fewer are being charged to the income statement, which increases reported profit for the period.
Valuation Methods
FRS 102 Section 13 requires stock (including WIP) to be measured at the lower of cost and estimated selling price less costs to complete and sell (also known as net realisable value).
| Valuation Basis | When Used |
|---|---|
| Cost | When the item can be completed and sold at a profit |
| Net realisable value | When cost exceeds the expected selling price minus completion costs |
Cost Flow Assumptions
When identical items are in production, the business needs a consistent method to allocate costs:
| Method | How It Works |
|---|---|
| FIFO (First In, First Out) | Earliest costs are allocated to completed items first; closing WIP carries the most recent costs |
| Weighted average | Average cost per unit is recalculated as new costs are incurred |
LIFO (Last In, First Out) is not permitted under FRS 102.
WIP and Stock Valuation
Getting WIP valuation right is critical because it directly affects:
- Gross profit – overstating WIP understates cost of sales and inflates gross profit
- Corporation Tax – higher reported profit means higher tax
- Balance sheet strength – WIP inflates current assets and therefore working capital
Common WIP Valuation Errors
| Error | Effect on Profit | Effect on Balance Sheet |
|---|---|---|
| Overstating completion percentage | Overstates profit | Overstates current assets |
| Including admin overheads in WIP | Overstates profit | Overstates current assets |
| Failing to write down to net realisable value | Overstates profit | Overstates current assets |
| Ignoring WIP entirely (common in service businesses) | Understates profit | Understates current assets |
WIP for Different Business Types
Construction Companies
Construction WIP is governed by long-term contract accounting. A building contractor working on a 12-month project recognises revenue progressively based on the percentage of work completed (measured by costs incurred, milestones achieved, or surveys of work done).
Accounting and Legal Firms
Time-based WIP is common. Partners review WIP balances monthly and decide whether to bill, write off, or carry forward unbilled time. A high WIP balance may indicate billing delays rather than productive work.
Software Development
Custom software projects accumulate WIP through developer time and third-party costs. If the company develops software for its own use (rather than for a client), the costs may be capitalised as an intangible asset rather than treated as WIP.
Manufacturers
Traditional manufacturing WIP follows the direct materials, direct labour, and production overheads model. Accurate tracking requires a costing system that captures costs at each production stage.
Managing WIP Effectively
Regular WIP Reviews
- Conduct monthly WIP reviews to identify stale, unbillable, or overvalued items
- Write down WIP that is unlikely to be recovered
- Monitor the WIP-to-turnover ratio as a measure of efficiency
WIP-to-Turnover Ratio
WIP-to-Turnover = (WIP / Annual Turnover) x 365 = WIP Days
| Business | WIP (£) | Turnover (£) | WIP Days |
|---|---|---|---|
| Accountancy firm | 120,000 | 800,000 | 55 days |
| Manufacturer | 85,000 | 2,000,000 | 16 days |
| Consultancy | 200,000 | 1,500,000 | 49 days |
High WIP days in a service business usually signals slow billing. The faster WIP converts to invoices and then to cash, the better the business’s cash flow.
Billing Discipline
For service businesses, the most effective way to control WIP is to bill promptly. Establish billing milestones, issue interim invoices on long projects, and do not let unbilled time accumulate beyond one month without a clear reason.