Work in Process: Easy Inventory Formula Calculation
The work-in-process inventory (WIP) is an indicator of the health of your company's supply chain. Whether you require raw materials to make custom handmade goods or you partner with several suppliers to source materials and then send them to the manufacturers for production, calculating the WIP helps you plan better and prevent over-stocking items you may not sell quickly.
But what is the WIP inventory formula?
Many eCommerce businesses will find it difficult to comprehend this complex terminology. That is why this article provides a comprehensive guide on the WIP formula, shedding light on how to calculate it.
What Is Work in Process Inventory (WIP)?
WIP refers to materials that have been initiated into production but have not been completed by the end of a business accounting cycle. It encompasses all inventory types that are in the intermediate stage between raw materials and the final products. Think of it as partially finished goods within any production round.
These materials are also referred to as goods-in-progress. For example, a motorcycle maker builds and sells old-fashioned bikes for private collectors. Making each bike usually takes around eight weeks, from assembling the basic frame to finishing the final details.
At the end of production – eight weeks – the maker counts its inventory, which includes 30 bikes. Around this time, there are seven unfinished bikes. These will be classified as WIP inventory.
To illustrate where WIP falls in the production line, let's consider it in the larger context of the manufacturing inventory.
- Raw materials: In the context of the motorcycle maker, they are the primary materials needed to make the final product, such as carbon fibre, steel, tyres, leather seats, etc.
- WIP inventory: The seven unfinished bikes that are waiting to be completed.
- Finished goods: The 30 newly produced motorcycles that are ready to be sold.
Once materials have been combined with direct labour but are not yet considered finished products, they are considered goods in progress.
WIP should not be confused with work in progress. While people often use both terms interchangeably, there are few differences between them.
Now that you fully comprehend what WIP is, you might wonder why eCommerce enterprises must classify them in the first place.
The Benefits of WIP in Business
Understanding WIP inventory and its costs is crucial for several reasons. First, firms that produce merchandise often store large amounts of items; calculating the goods in progress is an effective means for them to keep track of stock and the expenses associated with the production process. This includes monitoring direct labour and material costs and manufacturing overhead.
Aside from that, if the values are too high, it signifies a bottleneck or problems along the production line. Estimating it makes it easy for managers to pinpoint those problems and apply solutions when necessary. In addition, it provides a basis for measuring the performance of the manufacturing department. Key Performance Indicators (KPI) such as production efficiency, throughput and cost per unit can be obtained from the data.
Since WIP inventory is a crucial component of a firm's financial statement, getting an accurate figure can help report the value of the unfinished commodities on the balance sheet to get an accurate understanding of the enterprise's assets. Failure to do this can cause an overstatement or understatement of the cost of goods produced.
Managers can use the results of the calculations to make educated decisions about production schedules, inventory levels and resource allocations. Historical data about the WIP inventory can be used to forecast future manufacturing expenses, plan resource allocations and set realistic expectations.
The WIP formula
Calculating the WIP is straightforward. However, an understanding of some crucial factors is required to get it right. The formula is expressed as:
Ending WIP = Beginning WIP + Manufacturing costs - Cost of goods produced
Let's break the procedure down into its components to comprehend it better.
- Beginning WIP: This refers to the amount a firm has to initiate production at the start of the accounting cycle. It should be the same as the ending work in progress for the previous accounting cycle.
- Ending WIP: This accounts for the unfinished inventories that remain in production after each accounting cycle. To illustrate, if a business follows a bi-monthly accounting cycle and has £10000 in ending WIP at the end of February, this amount will be the beginning WIP for March.
- Manufacturing/production costs: They often include expenses such as raw materials procurement, equipment running time, labour, etc, that are incurred during the production process. For instance, if a factory spends £2000 to run its equipment, £3000 for raw material acquisition and £10000 for labour, then its total manufacturing cost will amount to £15000.
- Cost of materials produced: This refers to the total fee incurred to make the final products. It is determined by adding the production cost with the beginning WIP and then subtracting the ending WIP from the result.
Calculating the WIP Inventory
The following steps use the formula above to find the value of the WIP:
1. Find the value for every element in the formula
Use the financial information from the previous month's accounting cycle, such as the ending WIP, manufacturing cost and the cost of materials produced. For example, if your previous accounting cycle ending WIP is £20000, it will be the beginning WIP in the formula.
2. Add the beginning WIP with the production cost
Now that you know the beginning WIP and the cost of production, you can add both values. If the manufacturing cost is £30000, you should add it with £20000 to get £50000.
3. Subtract the costs of goods produced
Once you have added the production cost and the beginning WIP, you will subtract the cost of goods produced from the value. Let's assume the factory cost of goods produced is £40000; subtracting it from the sum of the beginning WIP and production cost, which is £50000, will give £10000, which is the ending WIP.
Let's visit the formula above once again and add all these figures so that you will understand it better.
£20000 (Beginning WIP) + £30000 (Manufacturing cost) - £40000 (Cost of goods produced ) = £10000 (Ending WIP)
The figure shows that the factory has £10000 worth of WIP inventory.
Strategies for Optimising Your WIP Inventory
Reducing WIP inventory is necessary for manufacturers that want to maintain efficient production processes and manage cost-effectively. Below are some strategies to help you lower the number of unfinished products at the end of an accounting cycle.
Define What Constitutes WIP Inventory
The number one step to managing your WIP stock more efficiently is to spell out what is in your business. Depending on the nature of your production process, your WIP merchandise may include semi-finished goods, raw materials, subassemblies or manufacturing components.
You should pinpoint and classify stock according to the phase of production, the lead time, value-added and demand to help measure and monitor the level, cost and turnover.
Enforce WIP Inventory Control
The process of tracking and controlling the storage and movement of unfinished goods during the production process is known as WIP inventory control. This task involves setting and enforcing rules and guidelines for labelling, handling, locating and transferring the products that have yet to be completed.
Aside from that, you also need to document the commodities using techniques such as barcode scanning, ERP software or RFID tagging.[1] This will allow you to maintain the accuracy and visibility of your data and prevent losses or damages.
Optimise Your Production Planning
Production planning is the technique of determining when to produce and how much to manufacture to meet your customers' orders and expectations. To reduce your WIP stock, you need to balance the supply and demand for your goods to avoid overproduction or underproduction.
There are various methods and tools available to assist you with that, such as scheduling software, forecasting, capacity planning, or batch sizing. Your goal here is to decrease the number of unfinished merchandise while maximising the quality of the completed ones.
Continuously Monitor Your Inventory
Inventory monitoring and tracking refers to the process of keeping a tab of your stock level, usage patterns, and movement and ensuring just the right amount of products is available to meet your buyer demand. You can utilise software that provides up-to-date data about your stock level to enable proactive decision-making.
Ensure Accurate Inventory Cycle Counts
Another way to avoid the buildup of the WIP stock is to ensure accurate inventory cycle counts. With an integrated Warehouse Management System (WMS), you can obtain precise, real-time calculations, making it easy for you to build more authentic predictions and communicate effectively with suppliers. By sharing data and insights with manufacturers, enterprises can develop more specific forecasts and lessen the risk of overstocking or stockouts.
Make Sure Your WIP Inventory and Your Customer Needs Align
Customer needs are the requirements and expectations they hold concerning the quality, variety, abundance, cost and delivery of your finished merchandise. You need to predict and understand what your buyers' want and ensure that they align with the production process in terms of quality to avoid unfinished goods that will remain unsold, leading to loss of money.
Strategies such as customer segmentation, feedback, market research and agile manufacturing can help you with that. Your aim here should be to increase the value of your finished goods and improve your competitive edge.
Implement Quality Control
Quality control is an essential part of manufacturing as it guarantees that goods are safe, consistent, and reliable and meet regulations. Also, it ensures that buyers receive what they paid for free from defects and meet their needs.
It is vital that businesses enforce robust quality control measures to reduce defects and rework. This is because high-quality items progress more smoothly through the production phase, limiting the risk of delays or unfinished products.
Implement Lean Manufacturing Principles
Lean production is a technique that focuses on reducing waste and seeking continuous process improvements in the manufacturing process. It is achieved by using lean principles and tools to eliminate leftovers from the production cycle.
Companies can use Just-in-Time (JIT) and Kanban to boost their inventory management. JIT makes sure that stock is ordered and received only when it is needed for production. This will reduce excess products and lower costs. Using Kanban will make it easy to know when to reorder items based on consumption rates.
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Preguntas frecuentes
What is the meaning of work in process?
This is a term that refers to partially completed goods within the production round. Within the supply chain, it can also refer to the total cost of unfinished materials currently in production.
How is WIP calculated?
Assuming your firm's beginning WIP is £30000, and your company spends £90000 on manufacturing costs. If the price of completed goods is £100000, adding the beginning with the production cost and subtracting the value from the cost of finished goods will give us the value of the WIP, which will be £20000.
What is an example of work in process?
An example of a work in process is a bakery that has 20 batches of dough that will be baked into bread soon. Or a tailor who has five suit materials that are cut but have not yet been sewn.
What is the formula for the WIP cycle?
The formula for calculating the WIP inventory is:
Beginning WIP Inventory + Manufacturing Costs - COGM = Ending WIP Inventory.
