Work in progress (WIP) is a term used to describe the costs incurred on a construction project that have not yet been billed to the client. Properly accounting for WIP is essential to ensure that a construction company can accurately track its financial performance and make informed business decisions.
When accounting for WIP, it is important to consider both direct and indirect costs. Direct costs include materials, labor, and equipment used on the project. Indirect costs include overhead expenses such as rent, utilities, and office expenses.
One method for accounting for WIP is to use a WIP schedule. This schedule is used to track the progress of each phase of the construction project, including the percentage of completion, the costs incurred, and the expected costs to complete the project.
Another method is the use of job-costing systems. This method is used to track the costs associated with each specific job or project. The job-costing system allows construction companies to track the costs of materials, labor, and equipment and compare them to the estimated costs for the job.
To ensure that WIP is accurately accounted for, construction companies should regularly review and update their WIP schedules and job-costing systems. This will help to ensure that any changes in the project or costs are reflected in the company’s financial statements.
It is also important for construction companies to use a consistent method for accounting for WIP, so that they can accurately compare the financial performance of different projects and make informed business decisions.
Overall, proper accounting for WIP is essential for construction companies to effectively manage their finances and make informed business decisions. By regularly reviewing and updating their WIP schedules and job-costing systems, construction companies can ensure that their financial statements accurately reflect the true costs of their projects.
Ashley Ingle, CPA