Definition and explanation
Due to its peculiar nature, the valuation of work in progress should include the cost of raw material used thus far as well as the cost of direct labour and production expenses used to bring the material into the state of work in progress.
The methods of actual valuation of work in progress are quite complex. However, it may be sufficient to indicate at this stage that generally there are three ways of valuing work in progress.
- It may be valued at its raw material content only. For products whose main cost comprises of raw material element only, this basis of valuation of work in progress is quite fair and practical.
- It may be valued at its prime cost content, i.e. the sum of raw material and direct wages. For products where direct labour and raw material constitute a major portion of the total cost (e.g. furniture making), valuing work in progress at prime cost is considered more appropriate.
- It may be valued at production cost. i.e. the cost of raw material used, direct labour used and production overheads incurred on work in progress are all computed and added up to arrive at the cost of work in progress at the year-end. This basis of valuation suits companies engaged in mass production where factory overheads are as significant as other components of production cost namely raw material and direct labour.
Once a valuation has been placed on work in progress. the accounting treatment is as described in article accounting treatment of work in progress.