In inventory management, work-in-process inventory (sometimes referred to as work-in-progress inventory or WIP) is inventory that is currently in production but not yet complete or ready to be sold. Most businesses categorize and monitor work-in-process inventory to ensure better resource utilization and cash flow.
This article will dive into the basics of work-in-process inventory, including how to calculate the value of work-in-process inventory.
What is work-in-process inventory?
Determining the value of work-in-process inventory is a dynamic process. It’s also an essential one given the sheer amount of raw materials, labor, and overhead costs readily invested in producing such inventory. One benefit of tracking the value of work-in-process inventory is having a clearer picture of how much of your organization’s cash is currently tied up in the manufacturing process and the value of that inventory, both for operational and financial reporting reasons.
Examples of work-in-process inventory vary from industry to industry. In the electronics industry, a partially assembled circuit board or a microchip in quality control checks qualify as WIP inventory. In the garment industry, fabric that’s currently being printed, weaved, or dyed would be classified as work-in-process inventory. In the automobile industry, a partially assembled car would meet the criteria.
Once manufacturing of these items is complete, they will be reclassified as finished goods. Keep in mind that many of the items that become work-in-process inventory are classified initially as raw materials.
Related: What Are the 4 Types of Inventory?
How to calculate work-in-process inventory
To calculate work-in-process inventory, you will first need to gather key data about your production process, the raw materials your manufacturing process relies on, and the resources utilized to manufacture goods.
Here’s how to get started:
1. Determine direct costs
How much cash is directly necessary for your operation to produce a given item? Consider the costs of raw materials and direct labor. A cost is considered a direct cost if it is clearly traceable to a specific unit of production.
2. Account for overhead costs
Beyond those direct and traceable costs are overhead costs. These include indirect expenses such as additional labor, facility maintenance, and expenses such as electricity and gas. Unlike direct costs, it’s often difficult to associate overhead costs with one specific thing that has been produced. Instead, these costs are more easily allocated to many production projects that co-occur.
3. Calculate total manufacturing costs by adding direct and indirect costs
To calculate your total manufacturing costs, add direct and overhead costs together. Use data and numbers only from the desired period of time.
Work-in-process inventory formula
How to calculate work-in-process inventory (cost per unit)
Now that you know the total cost of manufacturing your WIP inventory, you can determine the cost per unit of current WIP inventory with just a few more calculations:
1. Figure out how many units are currently WIP
The first step is simple: you’ll need to determine how many units are currently considered works in process at the end of the period. Good inventory tracking software can help you determine how many items are currently classified as WIP inventory, especially if you use tags or folders to identify them as such.
2. Divide those total manufacturing costs by total WIP units
Now that you know how many WIP units your business currently holds, you can divide the total manufacturing costs by this number to calculate a WIP inventory cost per unit.
Tracking work-in-process inventory
Like all other types of inventory, work-in-process inventory can be tracked using an inventory management system. Options include a manual inventory system, a spreadsheet inventory system, or inventory management software.
Typically, businesses with work-in-process inventory have many moving parts, making them good candidates for inventory management software, especially if the solution has automation features that can speed up tedious inventory-related tasks. For example, using barcodes and QR codes can improve the accuracy of inventory records and the speed at which those records can be updated.
The more accurate inventory records are, the easier it is to get instant and verified data about inventory, including the information required to calculate work-in-process inventory.
About Sortly
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