Valuing a manufacturer's work in progress
How a manufacturing client's partly finished goods are valued at year end, moved through the inventory accounts and brought into the ledger.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
At a furniture workshop on the last day of the year, some chairs are frames waiting for upholstery, some tables are sanded but not varnished, and a batch of cabinets is half assembled. None of it can be sold yet, and all of it has absorbed timber, glue, hours of labour and a share of the workshop's running costs. The question for the year-end statements is what it is worth.
Small manufacturers often leave work in progress out entirely, or count it as raw materials at the cost of the timber alone. Both understate inventory and overstate cost of sales. Valuing it properly is not complicated, but it needs a method the client can apply consistently and evidence the firm can check.
What counts as work in progress
Work in progress is anything that has left raw materials but is not yet a finished, saleable product. In a bakery it might be dough proving overnight; in a clothing factory, cut fabric waiting to be sewn; in an engineering shop, a part-machined component.
IAS 2 sets the framework for its cost. The cost of inventories includes all costs of purchase, costs of conversion, meaning direct labour and production overhead, and other costs incurred in bringing the inventories to their present location and condition. Work in progress is the clearest case of costs of conversion: it is materials plus the work done on them so far.
Valuing by stage of completion
AccountingTools' guide to work in process accounting explains that work in process is valued at the end of a period based on its percentage of completion, typically including the full cost of raw materials plus direct labour and overhead added in proportion to the work done.
A worked example in words. At year end the furniture workshop has a batch of cabinets that are about half assembled. All the timber and fittings have been issued to the batch, so the full material cost is included. Labour and overhead are added in proportion to the work done, so about half of what a finished cabinet absorbs. The total is the batch's work-in-progress value.
The method depends on three things the firm should see evidence for:
- Material cost per unit or batch, from purchase invoices and the bill of materials or recipe.
- Labour and overhead per finished unit, from payroll records and the client's overhead costs, worked out on a sensible basis such as labour hours or machine hours.
- Stage of completion at year end, from the count, with a description of what stage each item had reached.
Overhead is where judgement concentrates. It should include production costs only, such as factory rent, power for machines and supervision, not selling or head-office costs. The basis for spreading it should be documented and used the same way every year.
Moving costs through the inventory accounts
AccountingTools describes the flow. The work in process entry moves raw materials out of the raw materials inventory account, together with direct labour expense and factory overhead from the overhead cost pool, into the work in process inventory account. When a job is completed, its cost moves from work in process to finished goods, and on sale it moves from inventory into cost of goods sold.
For a client with perpetual records, those entries happen as production takes place. For most small manufacturers, they happen once a year as a single adjustment.
Periodic counts versus perpetual records
AccountingTools notes that work in process should be updated continuously in a perpetual inventory system, and is typically updated at the end of each period from physical counts and cost summaries in a periodic system.
For a periodic client, the year-end count is the whole basis of the figure. The count instructions should ask for work in progress to be listed separately from raw materials and finished goods, with its stage of completion recorded. Count records to collect before closing inventory lists the documents worth asking for.
For a client with perpetual records, the firm's job is to test them: compare the system's work-in-progress balance with a physical check of a sample of jobs, and look for jobs that have sat open for a long time, which may be abandoned or need writing down.
When stock movements do not reach the client's ledger
Clients whose books are on Achekam should know a current limit: stock counts, wastage, transfers and opening quantities do not post to the general ledger; only till sales and till returns move the inventory account.
So the work-in-progress figure, the move to finished goods and any wastage found at the count all need a journal. Practical options:
- keep raw materials, work in progress and finished goods in separate inventory accounts in the chart of accounts;
- have the client, or the firm, post a manual journal at year end that brings work in progress to its counted value, with the count and costing attached;
- record wastage found at the count as a separate adjustment, so it is visible rather than buried in cost of sales.
On the firm's side, Achekam's Studio lets staff post a year-end adjusting entry to bring work in progress into the statements where the client's ledger does not hold it. An entry that proves wrong is reversed with a record of who did it and why, never deleted. Depreciation of production equipment, which forms part of production overhead, is presented from the trial balance rather than calculated by Achekam, and flagged if the charge disagrees with the accumulated depreciation movement; check that flag before using the charge in the overhead rate.
Before the figure is used
- Work in progress is counted and listed separately, with stage of completion.
- Material, labour and overhead costs per unit are supported and current.
- Overhead includes production costs only, on a documented basis.
- Long-open jobs and damaged items have been considered for write-down.
- The year-end journal is posted and agreed to the costing schedule.
How labour and overhead are built into inventory cost is covered in more detail in costs of conversion in inventory. For each manufacturing client, agree the costing method in writing before the count, so the figures collected on the day are the ones the valuation needs.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
