Work In Process Inventory (WIP): Definition, Formula & Examples

/ Articles, Product Fulfillment Solutions Resources / By

Final products do not simply just appear fully finished. All sorts of products are made up of multiple components that need to be made or bought before they can be assembled into a final product. Think of how a car is produced: so many different parts that allow the car to function as a car have to be made including an engine, axles, and the chassis before the final product can actually be driven off.

The costs associated with the raw materials, labor, and production of an item also are included. Inventory accounting needs to  know your ending work-in-process (WIP) inventory.

 

What Is Work-In-Process Inventory?

WIP is a term referring to the partly finished materials included in any round of production. The WIP inventory and supply chain management sum to the total cost of unfinished goods currently in production. A company’s WIP inventory is also considered to be an asset on the company’s balance sheet.

When dealing with customized items such as crafts, jewelry, and others, businesses are more likely to keep watchful oversight on the WIP inventory process than a business dealing only with already finished goods.

 

Three Terms Related To WIP Inventory

Calculating the cost of WIP inventory is much more complex than calculating the value of the finished goods due to more intricate, moving parts. Here are some terms and calculations to achieve a better grasp of WIP inventory value.

1.     Manufacturing Goods

Manufacturing costs include all costs that are tied to the manufacturing of a finished product. Included in the manufacturing goods are the raw materials, labor, and overhead costs. The more WIP inventory being used in the production process, the higher material and labor costs will be. This can have a direct impact on the total cost of those manufactured goods. The formula for manufacturing costs is:

Raw Materials + Direct Labor Costs + Manufacturing Overhead = Manufacturing Costs

2.    Beginning Work-In-Process Inventory Cost

The beginning WIP inventory cost refers to the assets section of the previous accounting period on the balance sheet. To calculate beginning WIP inventory, determine the ending WIP’s inventory from the prior period and bring it over as the beginning figure of the new financial period.

3.    Cost Of Goods Manufactured

Also known as COGM, the cost of manufactured goods is the total costs incurred in the making of a final product. You have to know the final COGM to calculate the current WIP inventory value. The formula for COGM is:

Total Manufacturing Costs + Beginning WIP Inventory – Ending WIP Inventory = COGM

Work-In-Process Inventory Formula

After the beginning WIP inventory is determined along with the manufacturing costs and the COGM, it’s easy to calculate the amount of WIP inventory that you currently have. The formula for calculating the WIP inventory is:

Beginning WIP Inventory + Manufacturing Costs – COGM = Ending WIP Inventory

 

Calculating WIP Inventory Examples

Here are some simple examples to better understand WIP inventory.

WIP Inventory Example #1

Based on your previous accounting records, your company’s beginning WIP is $200,000. You then spend $150,000 on manufacturing costs. 5,000 final products were produced, each with a cost of $25 to produce on average. Your cost of finished goods is:

$25 x 5,000 = $125,000

Then calculate the ending WIP inventory amount:

Beginning WIP Inventory + Manufacturing Costs – COGM = Ending WIP Inventory

$200,000 + $150,000 – $125,000 = $225,000

Your ending WIP inventory would be $225,000 for the year.

WIP Inventory Example #2

As determined by previous accounting records, your company’s beginning WIP is $115,000. During the year, $150,000 is spent on manufacturing costs, along with your total cost of finished goods being $205,000:

Beginning WIP Inventory + Manufacturing Costs – COGM = Ending WIP Inventory

$115,000 + $150,000 – $205,000 = $60,000

 

What Is The Difference Between “Work In Process” And “Work In Progress Inventory?”

“Work In Process” and “Work In Progress Inventory” are often used in place of each other with discrepancies between them occurring depending on the industry they are being used in.

“Work In Process” typically is describing raw materials that are being converted to final goods during a relatively short time. “Work In Progress” tends to be used in the construction industry and refers to the current progress of a project based on a percentage of completion. Whenever these terms are describing a physical product being sold, their meaning is the same.

 

How To Optimize Work-In-Process Inventory Flow

The flow of WIP inventory is an indication of how efficient the manufacturer/supplier is at producing the finished goods. Working closely with a supplier and partners in a company’s retail supply chain (such as a 3PL) can help optimize this supply chain.

 

1.    Source The Right Supplier

Generally, a company won’t have too much visibility into the WIP inventory process unless the product is very customizable in its production. There is choice however into the manufacturer that is chosen as their partner, as well as the product sourcing. The manufacturer is in charge of finding ways to reduce costs as well as keeping track of the WIP levels. They also should be optimizing their labor, workforce, and processes of production. Here are some questions to ask the supplier:

  • Is there a way for us to cut costs and production lead times?
  • Where are the raw materials being sourced from?
  • Is there a way to reduce the distance between production and the supplier?

 

2.    Use A 3PL To Help With Inventory Management

Inventory is typically the biggest asset of an ecommerce business. Product Fulfillment Solutions’ technology and industry expertise allow you to better manage all of your inventory and orders.

Partnering with a 3PL such as Product Fulfillment Solutions can allow you to manage and view beginning inventory numbers, access demand forecasting tools, and gather data on inventory turnover.

 

Conclusion

Taking the time to better understand WIP inventory can give you a deeper understanding of your supply chain management, which means better optimization and more revenue.

If you need assistance with warehousing and fulfillment, partner with a 3PL that has the expertise, industry knowledge, and technology to help you make better business decisions.

Learn more about how Product Fulfillment Solutions will use decades of experience and insights to work with you to develop the best protocols and procedures to ensure your orders are delivered accurately, quickly, and at the best price.

 

Work In Process Inventory FAQ

–       How Do You Calculate Work In Process Inventory?

Use the work in process formula to get an accurate estimate:

Beginning WIP Inventory + Manufacturing Costs – COGM = Ending WIP Inventory

–       What Does Work In Process Inventory Mean?

WIP (Work In Process Inventory) is the total cost of unfinished goods currently in the production process. It is considered a current asset on the company’s balance sheet.

–       Why Is Work In Process Inventory Important?

Accurately knowing what your WIP inventory is can impact the company’s balance sheet. WIP inventory changes depending on how customizable the products are, what costs go into the product, and how to calculate it correctly for accounting purposes.

 

Want a personalized consultation to discover what 3PL solutions can do for your business? Contact PFS today!