Each commercial enterprise strives to ensure that in its work there are no downtimes that could adversely affect financial results. Such uninterrupted work assumes that at the end of the reporting period, there is some residual work in progress in processing. The correctness of the calculation of the cost of finished products directly depends on how correctly determined the volume of unfinished products. It is important to be able to evaluate these data correctly, because the size of tax payments and many other indicators depend on them.
What is work in progress
By definition, work in progress is products, goods, or products that have not passed all the necessary processing steps provided for by the technology. Thus, it may include the following types of products:
- raw materials and semi-finished products, the processing of which has already been started in order to turn them into finished products;
- incomplete products;
- goods that have not passed technical acceptance or the necessary tests;
- completed works (services) that have not yet been accepted by the customer.
In other words, work in progress in accounting is the cost of production costs (materials, resources consumed, depreciation, accrued wages to employees) and other expenses for products whose production has already begun, but has not yet been completed at the reporting date.
This amount of costs collected at the end of the period is not debited to other accounting accounts, but remains on the corresponding production account (for example, 20 or 23). And even if there was no production in the reporting period, but the costs were incurred, then such costs will be considered as work in progress. Subsequently, they will be attributed to the value of the finished product. The concept of "work in progress" is confronted even by those enterprises that engage in trade or the provision of services and do not produce any products. Costs incurred during the reporting period will be accounted as income tax until the time the goods (services) are sold.
Accounting
The volume of work in progress and its composition are very different for enterprises in various industries. The duration of the production cycle and the amount of costs can vary greatly depending on the nature of the products and the organization of the industrial process. Therefore, work in progress in the accounting of different enterprises can be accounted for in different ways from each other.
For companies with a long production cycle and for those providing complex services (design, scientific, construction, etc.), sales can be recognized as follows:
- upon completion of all work and signing of the necessary documents;
- as each individual work step is completed.
In most cases, the first option is used.
Work in progress in accounting is found both in the main and in auxiliary production, as well as in the work of serving farms. Accordingly, information collected on the following accounts of the same name is used:
- score 20;
- score 23;
- score 29.
The balances on the debit of these accounts at the end of the month - this is the work in progress at the enterprise.
For the second case, account 46 "Completed stages of work in progress" is provided. The account collects information about the completed stages of work, each of which has an independent meaning and is provided for by the concluded agreement.
Possible accounting entries involving an account:
| Accounting entry | The content of the business transaction |
Dt 46 - Ct 90/1 | Recognition of revenue in the amount of the cost of one completed stage of work when paid by the customer |
Dt 62 - Ct 46 | Write-off of the full cost of all work paid by the customer after completion of all stages |
Work in progress in the accounting of trading companies involves the remains of unsold products and their costs.
In the process of its work, the seller company faces a number of expenses: the purchase of goods, expenses associated with the provision of trade services (renting space, advertising expenses, staff remuneration, transportation costs, etc.). In trade, these costs are called distribution costs. In the presence of unsold goods, companies cannot completely write off the distribution costs incurred during the reporting period. The amount of such expenses should be allocated, while the share attributable to the balance of unsold goods remains on account 44 "Cost of sale".
Work in progress assessment
In the Russian legislation several options for assessing the wage arrears are considered. All of them are prescribed in paragraph 64 of the PVBU. So, we will consider them in order.
Calculation using actual cost
Extremely accurate method. In this case, all the costs associated with the output are collected. Its essence lies in the fact that the number of refinery units available at the end of the month is multiplied by the calculated average cost of a refinery unit.
Calculation using normative (or planned) cost
The use of this method assumes that the economists of the enterprise calculate the accounting (planned) price for the unit of wages. The advantage of the method is that when using accounting prices, the estimation of work in progress as a process is significantly simplified. The minus can be considered a more time-consuming process of calculating the cost of finished products. Deviations between accounting prices and the actual cost of the wage must be accounted for in account 20.
Settlement using direct cost items
The peculiarity of the method is that only the amounts of direct costs directly related to production are sent to the cost of work in progress. All other costs are transferred to the cost of the finished product. The list of these expenses is determined by the accounting policy of the enterprise.
Calculation of the cost of used raw materials
This method is similar to the previous one, with the difference that only the cost of raw materials (including semi-finished products) released into production is included in the prime cost.
However, these methods are not available to all organizations. The choice of evaluation method usually depends on the type of production. For a company engaged in unit and unit production, only accounting at actual cost is available. Organizations with mass and serial production have the opportunity to choose any of four accounting methods.
Cost of production
The cost of work in progress is the amount of money spent on the creation of products (work, services), which at the end of the reporting period is still in the process of processing.
Costing is an absolutely necessary process. Data on the cost of work in progress and ready for release products will be required in the preparation of financial statements. You can not do without them when forming the pricing and assortment policy of the enterprise.
To understand how the concepts of costs in work in progress and the cost of finished goods are related, it is worth considering the following formula:
- GP = WIP (balance at the beginning of the period) + Costs - WIP (balance at the end of the period). Where:
GP - the cost of production in the actual assessment;
Costs - production costs per month (debit revolutions on account 20);
WIP - balances, respectively, at the beginning or end of the month on the account 20.
Calculation of the cost of WIP
Economic elements
When managing cost, it is worth remembering the planning and rationing of costs. This will require the division of costs into various components in order to analyze the structure and control the change in the magnitude of each of them. In domestic practice, classifications are applied according to various criteria. In one of them there is a division of costs into economic elements, and in the other into costing items.
The composition of economic elements is established by PBU 10/99, it is the same for all commercial organizations:
- the cost of raw materials;
- salaries of workers;
- deductions to social funds;
- depreciation;
- other expenses.
Costing Articles
Of course, usually the costs of work in progress are not limited to this list. The list of calculation articles is more extensive and is determined by the enterprise independently, depending on the nature of production. However, the legislation proposed a standard nomenclature, including the following items:
- own raw materials;
- purchased semi-finished products or products, services provided by;
- returnable waste (deductible line);
- energy and fuel for technological purposes;
- the salary of production workers;
- Mandatory deductions and contributions to social funds;
- costs associated with the preparation and development of production;
- overhead costs (maintenance of the main and auxiliary production);
- general business expenses (expenses related to management);
- loss from marriage;
- other manufacturing costs;
- implementation costs (so-called selling expenses).
The first 11 lines form the production cost. In order to calculate the total cost of production, you will need to add all 12 articles.
For effective cost management, it is useful to use both of these groups.
Work Inventory
No operational accounting can guarantee the absolute accuracy of the credentials received. In order to clarify them, the organization conducts an inventory. The procedure for its implementation is determined by the Methodological Instructions. Before conducting an inventory, all materials, parts or semi-finished products for which the processing at this stage is completed are delivered to the warehouses. The rest of the raw materials, that is already at the workplace, but the processing of which has not yet begun, is recorded separately. The same applies to defective parts; they cannot be attributed to the remainder of work in progress.
According to current guidelines, an inventory must be carried out before compiling the annual balance sheet. In addition, depending on the specifics of production, enterprises conduct it on a quarterly or monthly basis.
The appointed permanent commission, approved by order of the head, conducts an inventory by weighing, remeasurement and actual counting. For each separate structural unit, a separate inventory is compiled, where the names of reserves, their stages or degrees of readiness, volume or quantity are indicated. In this way, the exact remnants of work in progress at the enterprise are determined.
When the inventory of work in progress is completed, the completed acts are transferred to the accounting department for processing. If discrepancies from the credentials are identified, collation statements are filled in , and surpluses or shortages are recorded by appropriate accounting entries. The commission needs to identify the culprits and the reasons for the deviations found in order to determine the procedure for writing off these amounts.
| Accounting entry | The content of the business transaction |
Dt 94 - Ct 20 | Write-off of the amount found during the inventory of shortages within the limits of the norms of natural loss |
Dt 94 - Ct 73/2 Dt 20 - Ct 94 | Write-off of the amount of shortage that occurred due to the fault of the staff |
Dt 94 - Ct 91 Dt 20 - Ct 94 | Writing off a shortage in the event that the guilty persons were not found |
Dt 20 - Ct 91 | Actual work in progress does not match accounting data. Identified and capitalized surplus |
Determination of the amount of WIP
Reducing the quantity of work in progress is useful in that it helps to accelerate its turnover, which, in turn, directly affects positively the turnover and profit. This can be achieved by reducing the duration of one production cycle while optimizing production and labor in the enterprise. At the same time, stocks in work in progress, their size and composition should be formed so as to ensure maximum uninterrupted operation and rhythm of the industrial process. The definition of these quantities is called the valuation of work in progress.
The standard of work in progress is the minimum amount of working capital, which is able to ensure continuous and uniform operation of the enterprise. This value should always be available to the company. For its calculation, the following formula exists:
- WIP = Volume cf. x x Cycle length x Coeff. growth, where:
The volume sr.sut - the cost of production per day (in monetary terms);
Cycle length - the duration of one production cycle (measured in days);
Coefficient of increase - coefficient of increase in costs.
Thus, it is clear that the standard wage rate is directly proportional to the volume of production of the enterprise, the duration of the industrial cycle and the degree of increase in costs.
Consider the contents of the formula in more detail.
The average daily volume of output is determined by dividing the value of output per year by the number of working days in a year. Obviously, the schedule of the enterprise directly affects the total amount.
By cycle length is meant the time required for raw materials (materials) sent to production to be converted into finished products.
The coefficient of increase shows the degree of readiness of products and is calculated using the ratio of the average cost of production to the production cost of GP.
- Coef. increase = Cost of production assets average. : Cost of production
This is not all the information that may be required to calculate the necessary reserves in work in progress. Experienced economists remember that understated volumes can cause the work to "rise", there will be a lack of resources, up to the inability of the enterprise to pay its obligations in a timely manner. And the excess of stocks can lead to the fact that the funds that could "turn around" and generate income, will come into a state of "freezing". Hence, losses, a decrease in profitability and an increase in the amount of various taxes paid are possible.
Unfinished production. Asset or Liability?
NZP meets all the necessary criteria to be considered an asset - it is a resource (property) owned by the enterprise and capable of bringing tangible benefits in the future. In turn, as we recall, the balance sheet asset is divided into two important parts: long-term (non-current) and short-term (current) funds.
Work in progress is often one of the main components of working capital of an enterprise. At the same time, work in progress is not separately displayed in the balance sheet of the enterprise. Data on it is contained in the section "Current assets", the line "Inventories" (1210). This line contains collective information about the following items:
- inventories;
- deferred expenses (BPO);
- shipped goods;
- unfinished production;
- finished products;
- goods for resale;
- other stocks and costs.
For enterprises with a long production cycle, it is possible to display the wage in the section "Non-current assets".
Work in progress in the balance sheet can be reflected in a separate line. This happens if the cost of it is a significant amount. You will also have to provide more detailed information in the appendix to the balance sheet and form 2 “Report on financial results”.
WIP in the reporting of small businesses
Since 2013, some changes have been adopted regarding the procedure for providing financial statements. New forms have also been developed. The basic principles in them remained unchanged, as before, the balance sheet is divided into two halves: Asset and Liabilities, the results of which must coincide. But for small businesses, a simplified form is now proposed, in which there are no sections, and the number of indicators is less than in the old one. Such a company can independently decide for itself which reporting option to choose, having previously fixed its decision in the accounting policy.
In the new form, as in the previous one, work in progress is an asset of the balance sheet; for it, there is still the line “Inventory”. Thus, both the name and the line code for small businesses have remained the same.
Instead of a conclusion
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