Work-in-process inventory, often known as WIP inventory, is very important in manufacturing. It represents partially finished products in various stages of production. Calculating the value of the ending WIP inventory helps firms in predicting production costs and track the flow of goods in the pipeline.
In this article, we'll look at the concept of WIP inventory, its role in the production cycle, and practical management approaches.
What Is a Work-in-Progress (WIP)?
Work-in-progress is a term used in production and supply chain management to describe the total cost of all raw materials and work in progress. Work-in-process inventory is any raw material that people have worked on but isn't yet a finished product.
Key Takeaways
- WIP (Work-in-Progress) represents the expenses associated with unfinished goods during manufacturing, comprising labor, raw materials, and overhead costs.
- On the balance sheet, WIP is classified as a current asset.
- It is crucial to minimize WIP inventory before reporting it since accurately determining the completion percentage for an inventory asset can be challenging.
- It's important to note that WIP differs from finished goods, which are products ready for consumer sale.
Understanding Work-in-Progress (WIP)
WIP stands for Work in Progress and refers to the costs of creating products and transporting them between manufacturing regions. WIP inventory refers to things that have been partially manufactured and have had human effort put into them but are not yet finished goods
A company's WIP balance covers all costs involved in goods that are still in the manufacturing process. These expenses include raw supplies, labor, and overhead. Accounting strategies for tracking WIP and other inventory accounts vary per company.
Accounting for WIP Inventory in the Balance Sheet
WIP inventory, like stock and raw materials, is accounted for as an asset on the balance sheet. For the balance sheet to be accurate, all costs associated with the WIP inventory, including raw material, administrative, and labor costs, must be considered.
Accountants typically assign all raw materials, collect all labor and overhead expenditures, and then record these costs as an asset entry on the balance sheet for WIP Inventory Account.
Read Also: Why ERP Is Important?
3 Metrics You Need to Know to Calculate the Current WIP Inventory
Before attempting your current WIP inventory calculation, you should be familiar with these three metrics:
1. Beginning Work In Process Inventory Cost
Determine the ending WIP inventory from the previous period and carry it over as the beginning number for the current financial period to compute the beginning WIP inventory.
2. Manufacturing Costs
Your manufacturing process costs include all costs connected with producing a final product. It covers the cost of raw materials (or production inventory), labor, and overhead. The higher the raw material and labor prices, the higher the total cost of manufactured items. The formula is:
Raw Materials + Direct Labor Costs + Manufacturing Overhead = Manufacturing Costs
3. Cost Of Manufactured Goods
The overall costs incurred to produce a finished product are referred to as the cost of manufactured goods (COGM). To compute the worth of your current WIP inventory, you will need to know the final COGM. COGM is calculated by adding total manufacturing costs to your initial WIP inventory. The total cost of manufactured goods is then calculated by subtracting the ending WIP inventory. The formula is as follows:
Total Manufacturing Costs + Beginning WIP Inventory - Ending WIP Inventory = COGM
Work-in-Process Inventory Formula
Work-in-process inventory is calculated by taking the ending inventory of the previous period and the starting inventory of the next period. Once you've determined your starting WIP inventory and calculated your manufacturing costs, you can easily calculate how much WIP inventory you have. WIP inventory can be calculated using the following formula:
Beginning WIP Inventory + Manufacturing Costs - COGM = Ending WIP Inventory.
How to Calculate Work-in-Process Inventory?
Work-in-Progress inventory is calculated in accounting using many ways. It is often calculated by determining how much of the overall costs for overhead, labor, and materials are spent on partially manufactured products.
For example, a construction business may calculate and bill another company for the work-in-process goods at different phases of completion, such as 25%, 50%, 75%, and so on.
How to Calculate Ending Work-in-Process Inventory?
Following are the steps to calculate the Ending WIP Inventory.
- Determine the total cost of production, divide it by the number of completed units and partially completed units, and determine the percentage of completion for the partially completed units.
- Multiply the number of partially completed units by the percentage of completion, and multiply the result by the cost per unit to calculate the ending work-in-process inventory.
- The resulting sum is the value of the finished work-in-process inventory.
What Is the Difference Between 'Work in Process' and 'Work in Progress Inventory'?
The terms 'work in process' and 'work in progress' are frequently used interchangeably, yet they can mean different things depending on the business.
- 'Work in process' usually refers to raw materials that are turned into completed goods inventories in a short period.
- In contrast, 'work in progress' is commonly used in construction and other service businesses to refer to the progress of a project and how much it costs concerning the completion percentage.
When these terms are employed by companies that sell actual goods, they both indicate the same thing.
Read Also: What Is Logistics?
Works-in-Progress (WIP) vs. Finished Goods
The difference between WIP and finished goods is determined by how complete the inventory is and if it is ready for consumer sale.
- WIP refers to the intermediate stage of inventory in which inventory begins as raw materials and is developed to turn into the final product.
- The term "finished goods" refers to the ultimate stage of inventory in which the product has attained a level of completion, and the next stage is the sale to a consumer.
Read Also: What Is Purchase Order Management Software?
How to Optimize Work-in-Process Inventory Flow?
For a sellable inventory, most e-commerce enterprises rely on a supplier or manufacturer. Understanding the process and movement of WIP inventory is important because it might show how efficiently your supplier or manufacturer generates finished goods.
A change in the stock-in-trade WIP inventory refers to the difference between the beginning and ending inventory levels of goods that are available for sale or in the process of being manufactured. Working with your supplier and other retail supply chain partners, you can develop ways to optimize the supply chain.
One of the most common ways that can be used to optimize WIP inventory flow is by connecting or sourcing the right supplier and by using third-party logistics to help with WIP inventory management.
Simplify Work-in-Process Inventory With TranZact
Ending work-in-process inventory is an important statistic for firms to manage and analyze their production efficiency and costs. Organizations can get insights into their inventory levels by precisely determining the value of partially completed units after a production cycle.
TranZact helps you know the effective management of work-in-process inventory and leads to improved overall performance and customer satisfaction with its lifetime free inventory management software.
FAQS on Work-in-Process Inventory
1. Is work in the process an inventory?
WIP inventories are also counted as inventory. A company's balance sheet will include all raw materials, components, and finished goods, whether it is used in WIP or finished inventory.
2. What is included in the work-in-process inventory?
Raw materials, manufacturing charges, and labor time are all considered a part of the WIP (work-in-process) inventory.
3. How does technology impact work-in-process inventory management?
Technology, such as manufacturing execution systems (MES) and enterprise resource planning (ERP) software, enables real-time tracking of work-in-process inventory, facilitates data analysis for process optimization, and enhances inventory visibility and control.
4. How can work-in-process inventory impact financial statements?
Work-in-process inventory is included as an asset on a company's balance sheet. Its value affects the calculation of the cost of goods sold (COGS) and impacts the business's profitability and overall financial health.
5. What item can be counted as "work in process"?
All of the materials, capital, and time put into making finished goods are counted as "work in process" (WIP).
