Can someone please explain how WIP accounting works?

WIP (Work in process) accounting is used to track costs for jobs as they pass through the manufacturing process. An important thing to remember is that there are no expenses at the factory level, only assets. WIP is considered an asset.

When work is begun, materials are transferred from the materials control account to the WIP account by debiting WIP and credit materials for the amount used.

Labor costs are added to the job by debiting WIP and crediting wages payable (not wage expense).

Overhead consisting of deprecation, utilities, misc. labor, and misc. materials is accumulated to an overhead account by debiting factory overhead and crediting accumulated depreciation, utilities payable, wages payable, (no expenses), etc…

To get the overhead costs from the overhead account to WIP, WIP is debited and overhead is credited. (There is another method for this, but this is the easiest and is probably all that is required if you are just learning WIP). The amount to transfer is determined using an estimated rate such as total overhead costs divided by total labor hours. This rate is then multiplied by the labor hours used during the job to calculate the amount to transfer or apply. The denominator does not have to be total labor hours, it can be machine hours, labor cost, units produced, etc…

So far, WIP should have several debit entries for the various costs incurred. When a job is finished, it is transferred to an inventory account called finished goods. This is done by debiting WIP and crediting finished goods.

Finished goods contains all the goods available for sale. When a good is sold, an expense can finally be recognized. The value of the good sold is debited to cost of goods sold (an expense) and credit to finished goods to reduce the inventory. Cash or accounts receivable is also debited and revenue credit for the amount of the sale.

As long as you remember to never use an expense account and that everything is an asset, you should be OK. There are other issues such as what to do with the balance in factory overhead since the actual and applied costs will almost never be equal, but you probably won't have to worry about that until later on.

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Originally Posted by KongTheKonqueror

When a job is finished, it is transferred to an inventory account called finished goods. This is done by debiting WIP and crediting finished goods.

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Actually, when you transfer a job to Finished Goods you would debit Finished Goods and credit WIP.

Yup your actually right after completed job we pass the entry that :

Particular Debit Credit
Finished goods xxx
Work in process(material) xxx
Work in process(labour) xxx
Work in process(factoryoverhead) xxx