Work in Progress (WIP) Inventory
In inventory management, when an input used in the production process has undergone some level of processing but has not yet been completely transformed into the final and finished product that is ready to be sold, it is known as a ‘work-in-progress’. In other words, the goods are partially finished, and ‘work’ is ‘in progress’ to transform these goods into the final product.
Closely tracking work in progress enables businesses to oversee and enhance their production processes, improve cash flow management, and deliver products to the market with greater efficiency.
In this article, we will closely explore the concept of Work In Progress, including why it is important, how it is calculated, and much more.
What Is Work in Process (WIP) Inventory?
WIP stock is the inventory of items in various stages of completion between raw materials and completed goods. Work-in-progress (WIP) inventory refers to raw materials transformed by human effort but is not yet available for sale.
In-process materials for a coffee shop include coffee beans, tins, bags, labels, and cartons.
All raw materials, direct labour, and administrative expenses associated with the finished product are included in WIP inventory costs. As a result, many companies put off establishing the value until just before the conclusion of the reporting period.
Along with raw materials and completed items, work-in-progress (WIP) inventory is recorded as an asset on a company’s balance sheet.
“Raw materials” are the components that will ultimately become your finished goods. Milk is one of your raw resources if you own an ice cream factory.
Stocks of completed items have been manufactured and are now ready to be distributed.
Distinguishing Between Work in Process and Work in Progress
Work in progress refers to producing goods that transition rapidly from raw materials to completed goods. A cloth factory with 50 fabrics in the making is an example of a work in progress.
Alternatively, work in process refers to extensive, lengthy endeavours. For example, a building project with three finished floors out of twenty-five is still under process.
Both terms are commonly used to indicate the current status of activities and projects in service and consulting businesses.
The Importance of Knowing the Worth of Your Work-In-Progress
Calculating the worth of your work-in-progress stock is essential for several reasons, even though doing so may be difficult. An adequately estimated work-in-progress stockpile ensures that your balance sheet reflects all forms of inventory, not simply finished items.
In addition, knowing the quantity of Work in progress is of much greater importance if you sell bespoke items. In this lesson, you will learn precisely what factors into production costs and how to compute them at year’s end. Furthermore, it provides insight into the selling price of products (COGS).
Identify Production Bottlenecks
Taking stock of your work-in-progress (WIP) inventory may help you identify sources of inefficiency in the manufacturing process. Thus, you may quickly enhance output by removing the obstacles you’ve recognised.
Manufacturing inefficiencies may be identified by calculating the typical number of days a company must hold units or works in progress before finishing and delivering them to customers, a metric is known as “work in progress days” (WIP days):
Productivity in Work In Progress (WIP) Days = Total Current WIP Used / Total Production Cost x Days
Let’s imagine your business operates for 360 days per year, and your entire production cost is $3,000,000. The current sum is $1,300,000, and the number of WIP days is 156.
This means that projects or units should run for an average of 156 days. Were you to go above that, consumers would turn elsewhere, making it impossible to sell the final product. As a result, it is recommended that you take on only a few assignments at a time to ensure production delays.
Accurate Business Valuation
Work-in-progress stock is an asset for every company. Undervaluing your stock is only possible if you account for work-in-progress. As a result, production costs will be inflated, affecting your profit. Therefore, figuring out your work-in-progress stock provides a more precise assessment of your company.
Reduce Waste
Another reason you should maintain a modest work-in-progress level is to keep the expenditures connected with it to a minimum. To “preserve” any form of inventory, including WIP, until it is finished, you need access to storage and warehousing space and various utilities, such as power and employees.
How Do You Calculate WIP Inventory Value?
Having additional variables makes assessing the value of your work-in-progress (WIP) inventory more complex than valuing your completed items.
Here are three key concepts to remember.
Beginning WIP Inventory Cost
For the initial value of work-in-progress stocks, go to the assets column of the balance sheet from the prior accounting period.
To get the initial work-in-progress stockpile, carry over the final WIP stockpile total from the previous accounting period.
Manufacturing Costs
“Manufacturing expenses” refers to the total amount spent on raw materials, labour, and overhead to produce a final product. The cost of raw materials and labour, which affects the price of completed items, rises as work-in-progress (WIP) stock increases. That’s why we use this formula:
The formula for calculating manufacturing costs is as follows: raw materials + direct labour costs + manufacturing overhead.
Cost of Manufactured Goods (COGM)
The term “cost of manufactured goods” (COGM) describes the total money spent on producing a product. To determine the worth of your current WIP stock, you need to know the final COGM.
The COGM is arrived at by first adding all manufacturing expenses to the WIP at the start of production and then deducting the WIP after production. That’s why we use this formula:
Manufacturing Costs = Raw Materials + Initial Work in Progress – Final Work in Progress
The worth of your work-in-progress stock may be determined if you know your initial WIP quantity, production expenses, and the price of your finished items.
Work-in-progress at the end of the period = work-in-progress at the outset plus manufacturing costs minus COGM[TM4].
WIP Inventory Examples
Let’s look at real-world examples to show the algorithm in action using a work-in-progress (WIP) inventory.
If your company’s accounting records indicate that your WIP inventory at the end of the previous quarter was Rs. 50,000, then that amount would be your commencing WIP inventory for the current quarter.
Example one: You spent Rs 225,000 on manufacturing expenses over the quarter and made Rs. 215,000 in sales revenue.
Here’s how you can figure out your finished goods inventory for the day:
Finished Goods Inventory minus Cost of Goods Manufactured
50,000+ 225,000-215,000=60,000
Example two: Assume, for illustrative purposes, that your first Work in progress for your shoe company is Rs.100,000. Production expenses in the new year total Rs.150,000. In addition, you create 5,000 pairs of shoes at Rs.30 for each pair, for a total manufacturing cost of Rs.150,000.
Then, determine the final value of your work-in-progress stock by using the formula:
Finished Goods Inventory minus Cost of Goods Manufactured
Rs 100,000 + Rs 150,000 – Rs 150,000 = Rs100,000
That means you ended the year with Rs 100,000 worth of WIP.
So, your WIP totals Rs.60,000 at the end of the day.
How Can We Minimise the Amount of WIP That We Have?
Manufacturing process changes, worker investment, and software to track inventory may all help bring down WIP levels.
Use Just in Time (JIT) Manufacturing
JIT manufacturing is a production strategy in which supplies are acquired and used only at the precise moment they are needed. Overproduction, waiting time, and excess inventory are all forms of waste that may be significantly decreased with the help of JIT. Because of this, material turnover increases and less capital is locked up in inventory.
Identify Bottlenecks in the Manufacturing Process
A production bottleneck may cause product delivery delays and force workers to work extra hours or skip other duties. But reducing bottlenecks decreases the Work in process time and maximises production. In most cases, adding additional resources (people or materials) to the slowing phase fixes the issue.
Upgrade Your Machinery and Workforce
Improving your equipment and staff are two of the most effective strategies to reduce factory work in progress (WIP). Employees should be provided with thorough training and guidance on how to complete duties. Reducing work-in-progress stock requires updating their equipment, though. Alternatives include increasing staffing levels, incentivising current workers, and repairing broken equipment.
Use Inventory Management Software
A low work-in-progress (WIP) inventory may be maintained using inventory management software, which records and supports correct inventory cycle counts. An up-to-date inventory count allows for more precise forecasting and improved lines of communication with suppliers and freight forwarders. In-Process (WIP) inventory flow is optimised with the help of inventory management software.
FAQs
Could raw materials be considered WIP?
The interaction of human labour with raw material marks the beginning of the Work in progress.
To locate initial WIP stock, what do you need to do?
The cost of work-in-progress at the start of the accounting period is the same as the cost after the preceding period (quarter, year, and so on). Just use that number as the baseline for your next accounting quarter.
What is Just-in-Time (JIT) inventory management?
A dynamic process, just-in-time (JIT) inventory management involves utilising things as they arrive rather than storing them until they are needed. This eliminates the need for excess storage space and waste.
Where should I record it on my balance sheet if I have inventory that is still in progress?
Finished goods inventory is recorded in the inventory asset account. The inventory also includes raw materials (the precursors to a product) and completed commodities (the fully assembled products ready to be sold).
Should taxes be paid on work-in-progress inventory?
Because work-in-progress (WIP) inventory is considered a current asset and is thus liable to taxes, you should limit the amount as little as possible while ensuring that you accurately value it.
