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Work-in-Progress is one of the three inventory stages, the others being raw materials and finished products. It plays an important role because it’s right in the middle, and a lot of managers and businesses don’t know how to handle it, and it’s inventory. This is what we’ll be talking about in this article.
Work-in-Progress is a production term referring to semi finished goods waiting to be finished. The cost of Work-in-Progress includes all the costs of raw materials used to produce the products. It’s the step right before assembly and being sold. Like raw materials, WIP can’t really be sold by itself, therefore businesses are always looking for ways to change them into Finished Products faster. Examples of WIP inventory could be the parts of a bike, waiting to be assembled, the rubber for the tires, the inner wheel, the handle bars, the bike body, etc.
In order to stay updated with their accounting data, businesses have to calculate the costs associated with the WIP inventory. There’s three pieces involved with the cost of a WIP inventory:
The first element in calculating WIP inventory, is the beginning cost of a WIP inventory. This can be found in the balance sheet of the previous period.
These costs are pretty self-explanatory, they’re all the costs associated with the manufacturing process. This includes everything from raw materials, to labor to overhead. The formula for calculating manufacturing costs is the following:
Unlike just manufacturing costs, the cost of manufactured costs is the entirety of costs incurred in making a final product. COGM is important because it’s the last element you’ll need to calculate the WIP inventory. COGM is calculated by adding the first two elements, the beginning Work-in-Progress inventory cost and the manufacturing costs. After adding the two, you subtract the end WIP inventory.
Once you found and calculated all the elements listed above, you can now calculate how much WIP inventory now, and the formula is:
There are certain things that businesses should do to better their management of their Work-in-Progress inventories. Like:
Besides the tips we outlined above, businesses should also be concerned about their overall turnover. Turnover is a ratio showing the speed at which businesses sold and replaced their inventories within a given period. Overall turnover involves multiple factors, not just Work-in-Progress inventory, but WIP inventory plays a key role, as stated before WIP is the important middle stage right before the final product is assembled, this is where everything comes together.