What is work in process inventory? Definition, formula and benefits for your business

Businesses always calculate WIP inventory at the end of accounting periods, whether that be a quarter, year, or some other time period. This total WIP figure is the ending work in process inventory for that accounting period—and the beginning work in process inventory for the next accounting period. It’s particularly important to monitor supply chain efficiency in a time of unprecedented supply chain disruptions leading to raw material shortages and extended lead times. These elevated lead times have led many merchants to forecasting demand and procuring inventory 6 months in advance (as opposed to historically forecasting on a quarterly basis). To avoid a buildup of WIP inventory, it’s important to work closely with suppliers for the most accurate projections of lead times possible.

To calculate the beginning WIP inventory, determine the ending WIPs inventory from the previous period and carry it over as the beginning figure for the new financial period. For some, work-in-process refers to products that move from raw materials to finished products in a short period. Companies usually calculate total work in process at the end of a month, year or other accounting period. The work in process formula is the beginning work in process amount, plus manufacturing costs minus the cost of manufactured goods.

Terms Similar to Work-in-Process Inventory

However, a much more comprehensive solution for companies of any size lies in manufacturing software. To differentiate between different financial periods, the WIP inventory value for the current period is sometimes also called the ending work-in-process inventory. The WIP account is updated on a regular basis, typically at the end of each accounting period or within preset intervals https://personal-accounting.org/what-is-work-in-process-wip-inventory-how-to/ like monthly, quarterly, or biannually. Or, it can be automatically kept up to date by using manufacturing software like an MRP system. At the beginning of the accounting period in March, Superior Glass had $7,000 in the WIP inventory account. As such, the difference between WIP and finished goods is based on an inventory’s stage of completion relative to its total inventory.

work in process inventory account

Calculating the value of WIP inventory involves associating a cost with a percentage of completion. This can be a bit time-consuming, so it’s typically best to tally it up at the end of your accounting period to minimize uncertainty on your company’s balance sheet. Basic resources are rolled into a factory, followed by loud noises and a smoking chimney. On their journey toward becoming final products, raw materials go through work in process inventory.

The Accounting Gap Between Large and Small Companies

Work in process (WIP) inventory is an important line item on a merchant’s balance sheet and a key indicator of the health of their supply chain. WIP inventory is not applicable to merchants who purchase finished goods from a supplier for resale. However, if your procurement process looks anything like the following three scenarios, you should be tracking and calculating your WIP inventory. If a manufacturer is constantly starting and stopping production, it can be costly and inefficient. With some WIP on hand, manufacturers can keep the assembly line moving even when disruptions or slowdowns occur.

Thus, it is important for investors to discern how a company is measuring its WIP and other inventory accounts. Allocations of overhead can be based on labor hours or machine hours, for example. WIP inventory constitutes all materials that work has started on that are not yet finished in manufacturing operations. The goods are no longer raw materials as they have accrued labor and overheads, but neither are they finished goods yet. In accounting, WIP is an asset designating the combined value of all unfinished goods. Usually, accountants assign all raw materials, gather all labor and overhead costs, and then record the sum of all these costs as an asset entry in the balance sheet.

What are the benefits of work in process?

That makes it a part of manufacturing inventory (see what is inventory). Think everything after raw material inventory and before finished product inventory. It’s all the production costs incurred for all partially-completed goods. Another title for work in process inventory is work in progress inventory (both abbreviated WIP inventory). Finally, you need the value of your finished goods, which is the total value of your inventory ready to be sold. Work-in-process inventory is also the general ledger account that reports the cost of the goods that are on the factory floor.

How do you record work in process inventory?

  1. Determine the starting WIP inventory.
  2. Calculate the manufacturing costs.
  3. Find the cost of manufactured goods.
  4. Calculate the conclusive WIP inventory.
  5. Create a WIP journal entry.

Next, the assembled table is sent to varnishing, whereupon the required amount of varnish also becomes part of WIP, along with the now assembled table. In accounting, inventory that is work-in-progress is calculated in a number of different ways. Typically, to calculate the amount of partially completed products in WIP, they are calculated as the percentage of the total overhead, labor, and material costs incurred by the company. A construction company, for example, may bill a company based on various stages of the project, where it may bill when it is 25% or 50% completed, and so forth.

The work in process inventory account and the finished goods inventory account are both classified as current assets on the balance sheet. The main difference is that WIP is considered to be a short-term asset while finished goods are considered to be long-term assets. When inventory has undergone full production and is in a stage that’s ready for sale, it becomes a finished good in inventory accounting.

work in process inventory account

There’s less risk to assume and less uncertainty to wrestle with on the balance sheet. The periodical WIP inventory calculation is informed by three important accounting metrics. These are the beginning WIP inventory value, the total manufacturing cost, and the cost of manufactured goods, also known as COGM. It is generally considered a manufacturing best practice to minimize the amount of work-in-process in the production area, since too much of it interferes with the process flow.

What is Work in Process (WIP) Inventory and How to Calculate It

Work in process (WIP) is inventory being worked on but isn’t ready to be shipped out yet. In other words, it’s goods that are in the middle of the production process. Work in process can also be used to refer to the total value of these goods. Understanding WIP inventory is crucial for monitoring and improving production capacity and inventory control. Unless you’re holding on to a substantial amount of WIP inventory is a part of a strategic anticipatory inventory management strategy. Beginning work in process inventory is actually the same thing as ending work in process inventory, just for a different accounting period.

Other common inventory accounts include raw materials and finished goods. Inventory accounts are reported as current assets on the company’s balance sheet. Use these accounts for internal analysis as well as external financial reporting.

How do you find beginning work in process inventory?

This is why, when doing periodic inventory, it may be desirable to first finish all manufacturing orders so the ending WIP would be zero. Otherwise, the ending WIP must be calculated manually by looking up all incurred costs for the unfinished production, or by using standard costs based on the stage of the goods’ completion. The WIP inventory account is a summary of all the job cost sheets of the given accounting period. For every credit or debit that is made in the WIP inventory account, a corresponding credit or debit must be made in one or more job costs sheets.

  • This covers everything from the overhead costs to the raw materials that come together to form the end product at a given stage in the production cycle.
  • The cost of the beginning WIP inventory is the cost of the unfinished goods that were in production at the beginning of the period.
  • The WIP figure reflects only the value of those products in some intermediate production stages.

For example, if the painting department is behind schedule, the frames that are already painted can be moved to the assembly line so that they’re not sitting idle. Keeping tabs on your work in process inventory requires some bookkeeping. If you’re not an accountant, you may wonder how a work in process inventory journal entry looks. Here’s a simple example that shows how records shift from debits to credits throughout the production cycle. Taking time to classify WIP inventory in a warehouse waiting to be assembled might seem tedious, but it’s crucial for monitoring and improving your supply chain and inventory control. While work in process and finished goods refer to various stages in an inventory’s life cycle, they have clear distinctions.

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