Work in progress (WIP) is unfinished production. To reach the factory cost of production, add the factory overheads to prime cost, then add opening WIP and subtract closing WIP.
This is the third step in manufacturing accounts, after calculating prime cost. Questions on this skill usually give opening and closing WIP and ask for the factory cost, or ask for a missing WIP figure.
Why do you add opening WIP and subtract closing WIP?
Think of a bakery that bakes loaves in batches. At midnight on the last day of the year, one batch is still in the oven.
- Opening WIP is last year’s unfinished batch. Last year’s costs are inside it, but the batch is completed this year, so it becomes part of this year’s output. Add it.
- Closing WIP is this year’s unfinished batch. It is not complete, so it must not be counted as finished output. Subtract it, and carry it forward to next year as opening WIP.
The costs of the year are therefore adjusted to match the goods actually completed in the year.
Worked example
Kilang Tin Mutiara makes tin containers. Prime cost for the year is RM 54,000.
Factory overheads are indirect wages 8,000, factory rent 6,000, power 4,500 and machine depreciation 2,500. Opening WIP is RM 4,000 and closing WIP is RM 6,500.
Step 1, total factory overheads: 8,000 + 6,000 + 4,500 + 2,500 = RM 21,000.
Step 2, total costs of the year: 54,000 + 21,000 = RM 75,000.
Step 3, add opening WIP: 75,000 + 4,000 = RM 79,000.
Step 4, subtract closing WIP: 79,000 − 6,500 = RM 72,500.
The factory cost of production is RM 72,500. The layout below shows how it follows on from prime cost.
| RM | |
|---|---|
| Prime cost | 54,000 |
| Indirect wages | 8,000 |
| Factory rent | 6,000 |
| Power | 4,500 |
| Machine depreciation | 2,500 |
| 75,000 | |
| Add opening WIP | 4,000 |
| Less closing WIP | (6,500) |
| Factory cost of production | 72,500 |
The mistake to watch for
A common slip is to reverse the WIP adjustment.
Mistaken answer: 75,000 − 4,000 + 6,500 = 77,500.
The student subtracted opening WIP and added closing WIP.
That treats unfinished goods at the year end as if they were finished, and ignores last year’s unfinished goods that were completed this year.
The error is 5,000, which is double the 2,500 difference between closing and opening WIP. The correction is: opening in, closing out. If closing WIP is larger than opening WIP, the factory cost is lower than the total of costs, as in the example.
Check yourself
Try these on paper first, then open each answer.
1. Prime cost RM 30,000, factory overheads RM 12,000, opening WIP RM 2,000, closing WIP RM 1,500. Find the factory cost of production.
Show answer
30,000 + 12,000 = 42,000. Add opening WIP: 44,000. Less closing WIP: 44,000 − 1,500 = RM 42,500.
2. Prime cost RM 60,000, factory overheads RM 25,000, opening WIP RM 3,000, and the factory cost of production was RM 83,000. Find the closing WIP.
Show answer
60,000 + 25,000 + 3,000 = 88,000. Closing WIP = 88,000 − 83,000 = RM 5,000.
3. A business forgot to deduct closing WIP of RM 2,400. Is the factory cost overstated or understated, and what happens to profit?
Show answer
The factory cost is overstated by RM 2,400, because a cost that belongs to next year was charged to this year. Cost of sales is too high, so profit is understated by RM 2,400.
Where this leads next
The factory cost of production now has to enter the income statement. Continue with transferring production cost to the trading calculation, and use the manufacturing accounts practice set to test the whole chain.
Students who struggle here often understand the arithmetic but not why unfinished goods are adjusted. In online one-to-one Accounting tuition, a teacher can build that reasoning with examples from your own questions.