Inventory Control

A Guide to Work-in-Process Inventory

April 19, 2024 • 4 min read

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?

Work-in-process inventory, often referred to as work-in-progress inventory or WIP, is inventory that is currently being produced but is not yet ready to be sold. Typically, organizations that carry work-in-process inventory are manufacturers.

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?

Male employee inspects metal work in process 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

Work in Process Inventory = Direct Materials + Labor Costs + Manufacturing Overhead Costs

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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Sortly is an inventory management solution that helps you track, manage, and organize your inventory—from any device, in any location. We’re an easy-to-use inventory software that’s perfect for large or small businesses. Sortly builds inventory tracking seamlessly into your workday so you can save time and money, satisfy your customers, and help your business succeed.

With Sortly, you can track inventory, supplies, parts, tools, assets like equipment and machinery, and anything else that matters to your business. It comes equipped with smart features like barcoding & QR coding, low stock alerts, customizable folders, data-rich reporting, and much more. Best of all, you can update inventory right from your smartphone, whether you’re  on the job, in the warehouse, or on the go.

Whether you’re just getting started with inventory management or you’re an expert looking for a more efficient solution, we can transform how your company manages inventory—so you can focus on building your business. That’s why over 10,000 businesses globally trust us as their inventory management solution.

Start your two-week free trial of Sortly today.