Although it can be tricky, there are several reasons you need to calculate your WIP inventory value. For starters, accurately calculating your WIP inventory it’ll keep your balance sheet updated with the different types of inventory and not just the goods sold. To calculate your business’s WIP inventory accurately, you will need to know the work in process inventory formula.

How to optimize your inventory management with WIP inventory

Work-in-process (WIP) inventory pertains to the goods for which the manufacturing has begun, but not yet completed. If there are delays in the production process, having some WIP can help to keep things on track. 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. The expenses of the resources added during the applicable time should then be included. Subtract the work-in-progress account’s ending balance for that time period to finish.

Product Fulfillment

• Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology.
• Work in process is an asset account used to report inventory items not yet completed.
• Wikipedia describes work-in-process inventory as a company’s partially finished goods awaiting completion and sale.
• One of the best ways to do that is to work with a third-party logistics partner to manage inventory.
• WIP inventory includes the cost of raw materials, labor, and overhead costs needed to manufacture a finished product.

There’s less risk to assume and less uncertainty to wrestle with on the balance sheet. Work in progress projects usually span many accounting periods, have more complex and technical requirements, and represent larger jobs such as building a building. Work in progress assets are much larger endeavors and may require capitalization if the work in progress investment is not an inventory item. For example, if a company decides to build an entirely new headquarter office, that project is considered work in progress that will be capitalized when it is completed.

Accounting Best Practices for Work-in-Process Inventory

And, finally, once the WIP inventory becomes finished goods, the $5,000 is debited to the finished good account and $5,000 is credited back to the WIP inventory account. Supply chain and managing all types of inventory are established fields of expertise now. And one thing that these professions agree on is that it’s usually best to minimize work in process inventory.

The terms ‘work in process’ and ‘work in progress’ are often used interchangeably, but depending on the industry, they could mean something different. ‘Work in process’ typically describes raw materials that are converted into finished goods inventory over a relatively short duration of time. QuickBooks is a complete solution for inventory management, offering everything from one-click processing and mobile scanning to inventory analysis and reporting. It has everything you need to keep your products, customers and transactions synced and secure, freeing you up to focus on your business. Some organizations avoid the issue entirely by outsourcing any work that involves work-in-process inventory.

To clarify where WIP inventory falls in the production process, let’s look at it in the larger context of other inventory classifications. All of the following terms are under the umbrellas of manufacturing inventory. Since WIP inventory takes up space and can’t be sold for a profit, it’s generally a best practice for product-based businesses to minimise the amount of WIP inventory they have on hand. 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.

But since unfinished business sounds a bit too ominous, manufacturers have decided to use the term work in process instead. You may also hear the term work in progress, but generally, that’s used more in the construction industry when talking about unfinished projects. Nobody wants their country’s tax office to audit them for filing incorrect taxes. WIP inventory is a taxed item since it is a current asset, and any understatement or incorrect accounting may incur significant penalties.

They aren’t yet ready for sale and are still listed under the inventory asset account in a company’s balance sheet. The inputted value of work in process inventory is often not the final amount, as other costs for packaging, storage, and transportation are also added in later steps. Finally, you need the value of your finished goods, which is the total value of your inventory ready to be sold. The WIP figure reflects only the value of those products in some intermediate production stages.

Work in Process Inventory (WIP): Definition, Formula, and Examples

The beginning work in process (WIP) inventory formula is a simple way to assess how much unfinished inventory you have at the start of a given period. Accurate WIP inventory management also facilitates better financial reporting – helping you to meet your legal obligations and maintain healthy cash flow. A bottleneck slows down the manufacturing process and may require employees to work overtime or sacrifice other tasks. But removing bottlenecks reduces the work in process time and maximises output. You can usually remove bottlenecks by allocating more resources (employees or materials) to the problematic stage. An accurate view of your inventory with real-time stock reports, sales monitoring and order tracking.