Work in Process Inventory Definition
Work in process Inventory is the total cost of materials used in the production phase, cost of labor used for conversion thereof and overheads incurred for the manufacturing process which are only partially completed and cannot be described as Finished Goods; the cumulative cost of which is shown as an item in Balance sheet under the broad head “Inventories”.
Work in Process Inventory Formula
As on the Balance-sheet date (usually December 31st), the organization is concerned with calculating the amount of ending inventory. Ending Inventory means the sum of Raw Materials, Work-In-Process, and Finished Goods. In a normal sense, this ending work-in-process inventory is the cost of unfinished goods lying on the production floor. Now, the question is how to calculate the same?
Before heading to work in process inventory formula, let us understand what is Opening Work in process. Opening work in process is the cost of unfinished goods at the start of the reporting period, which is completed during the year and treated as Finished goods held for sale. Since the work is completed, such finished goods are removed from the production floor and are shifted to Finished-Goods Warehouse.
Work in Process Inventory formula is represented as follows,
The following are types of work in process inventory –
#1 – Systematic WIP: This involves all the cost of materials, cost of labour engaged & overheads incurred in the production phase. This is the ideal way.
#2 – Unsystematic WIP: You can visit the production floor and physically count the units which are not yet completed. Apply the standard costs to these units and arrive at the amount.
Components of Work in Process Inventory
Work-In-Process is a mid-process of manufacturing activity. The components are as follows:-
a) Beginning WIP Costs
b) Cost of Finished Goods
c) Manufacturing Costs
The manufacturing costs include the following –
- Raw Materials: This is nothing but the cost of materials, which are required for manufacturing the final product
- Labour: Wages are paid to the laborer for transmission or conversion of raw materials into finished goods
- Overheads: Other than wages, certain other cost is also incurred. These costs are indirect labour, indirect material, depreciation of manufacturing units, cost of utilities (gas, water, electricity, etc), a general administration cost of the production floor, etc.
Example of Work in Process Inventory
Below is an example of work in process inventory –
Step 1 – Calculation of Total Material Costs
Step 2 – Calculation of Cost of Direct Labour
Step 3 – Calculation of Total Overhead Cost
Step 4 – Calculation of WIP Cost
Step 5 – Calculation of WIP Value at the end of the Year
Cost Accounting Journal Entries for WIP Inventory
a) Purchase of Raw Materials
b) Transfer of Raw Materials to WIP
c) Loading of Costs to WIP
d) Transfer to Finished Goods
Work in Process vs Work in Progress
The terms work in process and work in progress are used interchangeably, as something which refers to a middle process of the whole manufacturing process. Both terms are normally used as synonyms. However, there is a difference between the two, if observed deeply. Work in Progress, typically used in Supply Chain Management, refers to the cost of unfinished goods in the manufacturing process. It excludes the cost of materials not used in the manufacturing process and also the cost of Finished goods which are complete and held for sale.
On the other side, work in process refers to only the materials which are partially completed. It does not involve the cost of labor and overheads. This term used rarely when the manufacturing process takes a very short time like within a few hours. In this case, the cost of labor and other overheads is actually negligible and hence is ignored.
- The cost of consumables is usually not considered while loading overheads.
- If proper records are not maintained, it is possible to understate the Work-In-Process cost.
- Make sure that the percentage applied for loading the overhead cost is reasonable.
- Estimates are proper & not misleading
- Ensure Work-In Process cost does not pile up.
- The cost of finished products should be removed from Work-In Process cost as and when the product is ready.
Ending work-in Process inventory is very important since it is an asset of the organization. Ignoring its value, understates the inventories of the organization and so does the total assets. However, a high value of WIP indicates that manufacturing is slow and may involve some problems. The efficiency of the organization is also questionable in case of a high WIP amount.
This has been a guide to Work in Process Inventory and its definition. Here we discuss the formula how to calculate work in process inventory along with examples and its differences with work in progress. You can learn more about financing from the following articles –
- What is Inventory Valuation?
- Inventory Financing Meaning
- Inventory Write-Down Meaning
- Formula of Average Inventory
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