Work-in-Process Inventory WIP: Definition, Formula, and Examples

A company’s balance sheet will include all raw materials, components, and finished goods, whether it is used in WIP or finished inventory. Standardizing work in progress inventory your production and inventory processes ensures consistency and reduces errors. Develop clear procedures for handling WIP inventory, from initial tracking to final reporting, to keep production moving efficiently. This includes setting guidelines for data entry, inventory checks, and quality control.

Benefits of well-managed WIP inventory

• Directors who grasp these concepts can oversee more robust and responsive supply chains, which is essential in today’s fast-paced market environments.
• Almost all businesses list inventory under current assets on the balance sheet.
• To clarify where WIP inventory falls in the production process, let’s look at it in the larger context of other inventory classifications.
• Effectively managing WIP inventory and minimizing excess WIP levels can help improve cash flow by reducing tied-up capital and improving production efficiency.
• Yes, work-in-process is considered an asset on a company’s balance sheet because it represents value tied up in goods not yet completed.
• Another reason to classify WIP inventory is that it’s a significant factor in the valuation of your business.

If your procurement process looks anything like the following three scenarios, you should track and calculate your WIP inventory. Understanding WIP inventory can be challenging, especially since it consists of many moving parts during the production process. Understanding WIP inventory can help you better understand supply chain management, so you can find ways to optimize your supply chain to drive more revenue. Once your WIP inventory turns into sellable goods, you will need a system in place to track inventory as it’s being sold. ShipBob’s technology fully integrates with your store to easily manage all inventory and orders from one central dashboard while they fulfill your orders on your behalf.

What is Work in Process (WIP)?

It helps you make better decisions to improve your supply chain and boost important performance metrics. Think of JIT as an integral part of crafting a streamlined production process where every component has its place without excess lagging behind or taking up valuable space. With careful planning and execution, this system will just not optimise operations; it will also boost turnover by speeding up the entire manufacturing cycle. Discover how mastering this concept could unlock new levels of productivity for your business. Its raw materials are lumber, metal joiners and fasteners, plastic washers, stain, and varnish. Work in process would be lumber cut into table legs and tops, but not yet assembled or varnished.

How to Calculate Your Work in Process Inventory

Your raw materials inventory consists of table legs, varnish, and tabletops. When a manufacturing order comes in and a forklift driver is sent to QuickBooks fetch the table legs and tabletops, these materials become part of the WIP inventory because they have met with labor. Next, the assembled table is sent to varnishing, whereupon the required amount of varnish also becomes part of WIP, along with the now assembled table.

• The average inventory balance between two periods is needed to find the turnover ratio, as well as for determining the average number of days required for inventory turnover.
• Barcode and RFID (Radio-Frequency Identification) systems allow real-time tracking of materials and products as they move through different production stages.
• This example of work in process inventory shows how businesses track unfinished goods to control costs and improve efficiency.
• In other words, inventory represents finished goods or goods in different stages of production that a company keeps at its premises or at third-party locations with ownership interest retained until goods are sold.
• While WIP represents products that are still undergoing the transformation process, finished goods are the inventory that includes those items fully completed, ready for sale or shipment to customers.

Peak season for ecommerce businesses often spans the full Q4 period, from October through December. Now that we have understood all about the components required to calculate WIP inventory, let’s learn about how to calculate WIP inventory. Similar to any other calculations, calculating WIP inventory also consists of many components.

These calculations are valid for the periodic inventory method, and not needed in the perpetual inventory method, where the costs of individual products and unfinished production (i.e., WIP) are tracked continuously. If you are a company that is working with the work in progress inventory, then you need to understand the process and the flow of the inventory. This is important so that you can efficiently manage the supplier and the manufacturer.