Definition and Explanation

Due to its peculiar nature, the valuation of work-in-progress should include the cost of raw materials used thus far, as well as the cost of direct labor and the production expenses used to bring the material into the state of work-in-progress.

Valuation Methods for Work-in-Progress

The valuation methods used for work-in-progress are relatively complex. However, in general, there are three ways of valuing work-in-progress.

  • Raw materials content only
  • Prime cost content only
  • Production cost

In the first case, work-in-progress may be valued at its raw materials content only. For products whose main cost comprises the raw material element only, this basis of valuation of work-in-progress is fair and practical.

Work-in-progress may also be valued at its prime cost content (i.e., the sum of raw materials and direct wages).

For products where direct labor and raw materials constitute a major portion of the total cost (e.g. furniture making), valuing work-in-progress at prime cost is suitable.

Finally, work-in-progress may be valued at production cost. In this case, the cost of the raw materials, direct labor, and production overheads used 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 is suited for companies involved in mass production, especially where factory overheads are as significant as the other components of production cost (namely, raw materials and direct labor).

After a valuation has been placed on work-in-progress, the accounting treatment is undertaken as described in our article covering the accounting treatment of work-in-progress.

Frequently Asked Questions

What is the value of work-in-progress (WIP)?

The value of WIP is the estimated net present value of the future Cash Flows associated with the project. This estimate is based on the expected revenue from the project and the costs incurred to date. The value of WIP may be positive or negative, depending on whether the estimated Cash Flows are greater or less than the costs incurred to date.

How is WIP valuation calculated?

The value of WIP is calculated by estimating the net present value of the future Cash Flows associated with a project. This estimate is based on the expected revenue from the project and the costs incurred to date. The value of WIP may be positive or negative, depending on whether the estimated Cash Flows are greater or less than the costs incurred to date.

What factors should be considered when valuing WIP?

There are a number of factors that should be considered when valuing WIP, including: -The expected revenue from the project -The costs incurred to date -The expected duration of the project -The discount rate used to calculate the present value of the future Cash Flows

Why is it important to value WIP?

It is important to value WIP because it provides a measure of the financial performance of a project. The value of WIP can be used to make decisions about whether to continue with a project, how to allocate resources, and how to price products or services.

How often should WIP be valued?

WIP should be valued at least once a month, and more frequently if there are significant changes in the project or the company's financial situation.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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