Work in process inventory: a detailed Guide

Once the manufacturer gets the raw materials in-house, the process for making the finished products begin. Thus, the inventory which is in the process of turning into finished products from the raw materials is called work in process inventory. 

However, let’s look at some popular definitions of the term

Definition:

According to Wikipedia,

“Work-in-process is a company’s partially finished goods waiting for completion and eventual sale or the value of these items. The term is used in production and supply chain management.

As per the Merriam-Webster dictionary, 

“Work-in-process (WIP) refers to a component of a company’s inventory that is partially completed. The value of that partially completed inventory is sometimes also called goods in process on the balance sheet (particularly if the company is manufacturing tangible items rather than providing services).”


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Work in process formula

It is essential for any manufacturing company to know the exact amount of inventory they hold whether it is in terms of raw materials or work in process inventory. Inventory management helps in counting and maintaining all kinds of inventory.  The accurate number of inventory by regularly counting the stock will give the manufacturer a fair idea of how much needs to be produced and also help in forecasting the production as per the demand.

Apart from this, calculating work in process expenses is one of the important tasks for financial management. While recording the inventory in the financial balance sheet, work in process inventory is mentioned as assets.

Now for calculating this one must refer to the balance sheet of the previous quarter, month or year to get the required details. 

To calculate the work in process inventory, you need to use the following formula:

Beginning work in process amount + manufacturing costs – cost of manufactured goods

For instance, let us assume a company called Crown Industries who is into manufacturing furniture.

As per the previous year’s balance sheet, Crown industries have $8000 worth of beginning work in process inventory and they incur $ 240,000 as manufacturing costs and their total worth of finished goods is 238000 

Therefore,  as per the formula, 

8000+ 240000 – 238000 = 10000 

This means that Crown Industries has $10000 work in process inventory with them. 

However, by using this formula, you can get only an estimate of the work in process inventory. For the exact number of work in process inventory, you need to calculate it manually. One of the advantages of calculating it manually will be you can add expenses like the cost of scrap, spoilage of raw material, etc. as well in it since it is all visible during physical counting.

Difference between work in process and work in progress

Though both these terms are used interchangeably, their meaning differs in the business terminology. Here are some of the major differences between work in process and work in progress: 

  • Work in process is generally used by companies into manufacturing products since the products that are in process and not yet transformed into finished goods can be counted or recorded in the books of accounts.Whereas, Work in progress is a term used mainly in the construction business when a certain building is being constructed.
  • Work in process is generally used for unfinished products that will be turned into finished products soon. For example, a bakery having 50 batches of bread under production is work in process or a tailor sewing suits has 5 suits that are cut but they have not yet been sewed then all the 5 suits will be counted as work in process.Whereas, Work in progress takes a long time to convert into a finished product. For example, a building whose 3 floors are constructed out of a planned 25 floors building is a work in progress.
  • Work in process is a term used to describe products per se.Whereas work in progress can be used for services, work assignments, home renovation, and relationships as well. Thus, has a broader meaning than the former term.
Krishna
WRITTEN BY

Krishna

Krishna Jani is a content specialist with 10+ years of experience in the field. Presently working as a professional writer for Orderhive, no.1 inventory management software that powers several businesses all across the world. She is an avid birder and nature lover who loves to explore national parks and wildlife sanctuaries during her leisure time.