Work in Process vs. Work in Progress: What’s the Difference?

Work in Process vs. Work in Progress: An Overview

Work in progress describes the costs of unfinished goods that remain in the manufacturing process, while work in process refers to materials that are turned into goods within a short period. The terms work in progress and work in process are used interchangeably to refer to products midway through the manufacturing or assembly process.

Work In Process

Work in process represents partially completed goods. These goods are also referred to as goods-in-process, and for some, work in process refers to products that move from raw materials to finished product in a short period. An example of a work in process may include manufactured goods that take less an a full accounting cycle to normally complete.

This inventory is found on a manufacturing company’s balance sheet. This account of inventory, like the work in progress, may include direct labor, materials, and manufacturing overheads. A company often uses internal allocation methods to determine the estimated financial value of work in progress. For example, the company must not only assess the financial value of incomplete goods but estimate what percent complete its products are.

Work In Progress

Work in progress is sometimes used to refer to assets that require a considerable amount of time to complete. The underlying assumption regarding work in progress is there is larger project framework in play that requires a heavier investment in time for the process. Although some companies use more specific types of general ledger accounts for construction projects, a large build may be considered an example of work in progress.

Work in progress is also reported on a company’s balance sheet. As additional billings are incurred, the value of the work in progress account increases. A company may choose to determine the asset’s fair market value (FMV) assessment as part of its annual financial reporting requirements. For example, consider a 40-story skyscraper that is 75% complete; it may be warranted for a company to recognize additional financial benefits beyond costs as a FMV adjustment.

Key Differences

Many companies use both terms interchangeably to describe incomplete assets. However, there are subtle differences between work in process and work in progress.

Scope of Work

Work in process often indicates repetitive steps within a manufacturing process. A standard set of machinery/equipment may be used in conjunction with bulk raw material inventories to produce a standardized product. Though these products can still be larger in size or monetary value, it is more often associated with smaller, higher quantities of production.

On the other hand, work in progress is more representative of massive, one-time undertakings. These projects have much longer timelines and may take years to complete a single instance. Consider an example of the build-out of a custom yacht; there is only one time, a set of diverse materials, and a longer timeframe needed for complete than simpler products.

Industries

Due to its nature of repeating a process that is integrated with standardization, work in process is often used more heavily in manufacturing. It can be used in any industry where there are partially completed goods. Work in progress is often tied to construction or other industries associated with large builds. The billing scheme for these industries is referred to as progress billings (not process billings) where companies get paid based on the percentage complete of the project.

Financial Statements

Both types of accounts are found on a company’s balance sheet. However, the nature of each may be slightly different and require different accounting treatment. Work in process may refer to items of inventory with quicker turnover. Because the timespan of completing and selling work in process assets may be short, it may be reasonable to treat work in process as a short-term asset, especially if work in process is considered to be heavily tied to raw materials and inventory.

On the other hand, work in progress assets are usually treated as long-term assets. These undertakings may take years to complete, and the financial benefits of work in progress projects may not be fully recognized within the next year.

Accounting Treatment

Some companies may attempt to complete all work in process items for simpler, cleaner financial statements. Though not required, the goal is to eliminate any pending products to only report completed goods. When these goods are completed, they are often transferred to inventory to later to be treated as a cost of good sold when purchased by a customer.

Work in progress assets are much larger endeavors and may require capitalization if the work in progress investment is not an inventory item. For example, if a company decides to build an entirely new headquarter office, that project is considered work in progress that will be capitalized when it is completed. Where work in process is often not depreciated over time, work in progress is more like to incur depreciation expense over its useful life.

Asset Liquidity

In a bind, a company will find it much easier to liquidate work in process items. Though these goods are incomplete and still require some work to become finalized goods, the timespan in doing so is much shorter than work in progress goods. In addition, the market may be more willing to buy work in process goods outright if they are for standardized goods.

Work in progress items will have substantially less liquidity, and the company incurring work in progress costs may find it much more difficult to liquidate the asset as it is being completed. Work in progress items (i.e. the construction of a new warehouse or specialized piece of equipment) may be very specific to a company and hold little to no value to other market participants. Work in progress items may require substantial pricing discounts to entice buyers, especially if the items are not standardized.

The Bottom Line

Developers and manufacturers take raw materials and convert them into finished goods. Depending on the scope of the undertaking, they may be better suited to report work in process or work in progress. Work in process usually refers to more standardized manufacturing practices of smaller products, while work in progress usually refers to larger, longer builds of more technical assets. In both cases, a company develops an asset but the reporting and accounting treatment may vary.