Work in process inventory is such asset that is still in the process of completion and not yet ready to be categorised as finished goods.In a manufacturing concern raw materials are converted to finished goods by applying labour and overheads (thus the main reason why labour and overheads cost collectively called conversion cost).
However, it is not necessary that the number of units that were started during the period are fully converted or finished and thus take the status of finished goods. Therefore, the goods on which labour and overheads costs are applied but not yet converted completely are called work in process inventory. They are also named as work in progress inventory.
Inventory is not complete if there is still some material to be added or labour or overheads cost to be applied. But as some work has been done it cannot be categorised as raw material or consumables. Similarly, as it is not finished yet it cannot be classified as finished goods either. Therefore, even IAS 2 – Inventories recognize such state of stock held by the entity at the end of the period. Due to the same reason as they are in the middle of raw material and finished goods state their value is higher than raw material or supplies but lesser than finished goods. However, it depends on the policy of the entity regarding what constitutes cost
As work in process or work in progress (WIP) is considered a separate category of goods therefore even in the financial statements they are disclosed separately from raw materials and finished inventory. WIP is measured on the basis of cost incurred so far i.e. whatever expenditures are made so far will be considered as value of WIP and the same is used while valuing inventory for financial reporting purposes.
In case of service oriented entity the supplies or materials or any other inventory used in the provision of services may be considered as a work in progress.
IAS 2 requires entity to make clear disclosure regarding inventory which is held as work in progress at the end of the period. Although on the face of financial statements single lime item as a total of raw material, work in progress, finished goods and supplies inventory is reported under current assets. However, in the notes to financial statements entity shall disclose the amount of inventory classified as work in process.
In cost accounting, WIP is valued differently under different costing techniques. Some value WIP on the basis of any cost incurred so far. Some techniques value WIP only on the basis of material costs incurred as conversion cost is considered as period cost. Some managerial techniques consider WIP as a loss for the period as they are not saleable therefore cannot bring any benefit and above that cost incurred so far is considered as stuck up cash and to secure that even more entity might bear in terms of holding cost. Therefore, valuation of WIP depends on the costing technique used as well.