Work in Process Inventory: Guide for 2023

6/6/2023

Work in Process Inventory: Guide for 2023

The manufacturing process of turning raw materials into finished goods is a lengthy one. The inventory used in the process is treated differently at every stage of the production cycle. 

One of these stages is called Work-in-Process inventory. 

What is Work-in-Process Inventory?

Work-in-Process inventory is an inventory management process that includes the inventory being worked on (partially finished) but isn’t finished and ready to be shipped yet. You can say all the raw materials that are in the middle of the production process fall into this category. 

In accounting, work-in-process inventory refers to the total value of the goods that aren’t raw materials but aren’t finished goods either. 

Metrics to Calculate Work-in-Process Inventory 

Identifying work-in-process inventory is more difficult than you think since you’re defining the costs of the parts that are on the move. There are three things you’d need to calculate the work-in-process inventory which are:

  • Beginning WIP Inventory 
  • Manufacturing Costs 
  • Cost of Goods Manufactured (COGM). 

The work-in-process inventory formula is 

WIP = [beginning WIP inventory + manufacturing costs] – COGM

Let’s take a closer look at these metrics

1. Beginning WIP Inventory Costs

The previous year’s reporting period ending work-in-process inventory is your beginning WIP inventory costs. It’s possible that a business doesn’t have a beginning WIP inventory at all since they didn’t end up with a surplus the previous year. It’s definitely a good thing but in reality, companies will have at least some WIP that is carried forward from the previous year. 

2. Manufacturing Costs

Consider all the costs that go into your entire manufacturing process of making a finished product. This typically includes your costs of raw materials, overhead costs, and the labour associated with it. 

The total manufacturing costs are the total of all these expenses along with all the resources spent while manufacturing a finished good. Manufacturing costs are further divided into direct labour costs, raw materials, and manufacturing overheads. The formula to calculate manufacturing costs are:

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

3. Cost of Manufactured Goods

The cost of goods manufactured involves all the costs of producing a product such as direct labour, indirect labour, raw materials, and overhead costs. In short, it includes all the manufacturing costs plus the difference between the beginning and ending work-in-process inventory. The formula for calculating this cost is:

Cost of Manufactured Goods = Manufacturing Costs + Beginning WIP Inventory – Ending WIP Inventory

This cost is used to measure the actual costs with the projected costs. 

Why you should Calculate Work in Process Inventory

You must be wondering why it is necessary to calculate inventory which isn’t even turned into a finished product since you’re already calculating the costs of raw materials and finished goods. The answer lies in defining the efficiency of your manufacturing process. Some of the top reasons you should calculate Work in Process inventory are

1. Avoid Hindrances in Production 

WIP gives you an insight into the production process and how much raw materials are consumed at a particular time. There is a concept called WIP days (Total Current WIP Used / Total Production Cost x No. of Days) which is the average number of days you can keep particular units in progress. 

This data helps suppliers identify hindrances in the production process and reflects just how many days a factory should take to manufacture finished goods. If it exceeds the number of days, you might not witness any success with sales since your customers already looked elsewhere. 

2. Reduce Waste and Achieve Economies of Scale

WIP calculations show you how much you should reduce your costs to keep them low and reduce waste. A high work-in-process cost means you’re putting more resources like electricity and staffing to preserve inventory. 

Whereas, a high work-in-process inventory allows you to achieve economies of scale. It means you can buy new materials in bulk and utilise the assembly line more efficiently. It helps you optimise your manufacturing and produce more goods at a lower cost.

3. Provides an Accurate Business Valuation 

WIP is a part of your business asset valuation. If not calculated, you’d see a big discrepancy in the number of raw materials and finished goods. You won’t get an accurate figure of the cost of goods manufactured which will ultimately impact your bottom line. 

Work in Process helps you rightly value your inventory, thereby, giving you a more accurate business valuation. 

Things to Consider for Optimising Work in Process Inventory Flow

1. Choose the Right Supplier

The supplier you choose largely defines how your product will turn out. The first step would be to choose the right supplier who you can trust with the manufacturing process even with a lack of visibility. 

If your manufacturers can keep a track of WIP levels, they can find ways to reduce waste, and costs, and optimise their resources. If the supplier is economical in its ways, you can be assured of a low work-in-process inventory cost and higher efficiency in the process. 

2. Use a 3PL for Managing Inventory 

Inventory management is a tedious process in general. And it becomes more challenging as you scale your manufacturing. But getting an authentic insight into what inventory is where at what particular time is important. 

You can trust a 3PL provider to manage and track your inventory for you. They have industry expertise and are technologically equipped to deal with different types and sizes of inventory regardless of whether they are raw materials, work in process or finished inventory. 

You can easily fetch real-time data on beginning inventory, days on hand, inventory turnover, and more. The 3PL provider also provides the necessary warehouse space to stock your units and uses automation to track, measure, and calculate the inventory. 

Wrapping Up

Work-in-process inventory can help you optimise your overall manufacturing process. But if you need help with your inventory management, be sure to partner with a logistics provider like PACK & SEND. 

We can help you provide the necessary assistance and services, data, to grow your business and streamline your manufacturing process. Contact us today to know how we can assist you to optimise your inventory management and supply chain. 

 

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