Accounting treatment of work in progress

Accounting Treatment of Work in Progress

  • Any work in progress at the beginning of the financial year would become a part of the goods manufactured in that year even though it was fed (in the form of raw material and labour etc.) into the machines in the previous year. Its value should, therefore, be added to the Cost of Goods Manufactured in the year in which finished goods come off the machines.
  • Any work in progress at the end of a financial year though fed (in the form of raw material and labour etc.) into the machines in the current year will become finished goods in the next year. Hence its value should be excluded from the Cost of Goods Manufactured in the year in which it is fed into the machines.

The above two points lead us to the conclusion that:

  • The value of opening stock of work in progress should be added to year’s production cost, and the value of closing stock of work in progress should be deducted from it to arrive at the correct cost of goods manufactured for the year.

Another way of arriving at the correct cost of goods manufactured would be to first calculate the difference between the values of opening and closing stocks of work in progress and:

  • Add the excess of opening stock over closing stock of work in progress to production cost, or deduct the excess of closing stock over opening stock in progress to production cost
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The above entry is called work in progress adjustment and is made in the production cost statement or manufacturing statement at a suitable stage depending on the basis of valuation of work in progress.

If work in progress is valued at raw material contents only:

    •  Add the excess of opening stock over closing stock of work in progress to cost of raw material used. or
    • Deduct the excess of closing stock over opening stock of work in progress to cost of raw material used Before arriving at the final cost of raw material used

If work in progress is valued at prime cost:

Add the excess of opening stock over closing stock of work in progress to Prime Cost, or Deduct the excess of closing stock over opening stock of work in progress to Prime Cost Before arriving at the final prime cost.


If work in progress is valued at production cost:

Add the excess of opening stock over closing stock of work in progress to production cost, or Deduct the excess of closing stock over opening stock of work in progress to production cost before arriving at the final production cost.

If an examination question does not clearly specify the basis of valuation of work in progress, it should be assumed to have been made at production cost. Hence the work in progress adjustment should be made at the end of the manufacturing cost statement as shown above.

Example:

Basic facts as for example given in production cost. Now assume that the following additional information about work in progress is available:

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Work in Progress at the beginning of the year = $35,900
Work in Progress at the end of the year = $32,400
Work in Progress is valued at raw material content. Re-draw the Manufacturing Statement.

Solution:

Since the work in progress is valued at raw material content, the work in progress adjustment will be made at the time of arriving at the final cost of raw material used. The second point is that opening stock of work in progress ($35,900) is more than the closing stock ($32,400) by $3,500. Hence, the Work in Progress Adjustment will be an addition to cost of raw material used by $3,500, as shown below:

manufacturing statement for work in progress

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