Work in Progress Inventory - Manage the Middle
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.
Definition
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.
Things Involved With WIP Inventory
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:
Beginning Work-in-Progress Inventory Cost
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.
Manufacturing Costs
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:
- Raw Materials + Direct Labor Costs + Indirect Costs = Manufacturing Costs
Cost of Manufactured Costs (COGM)
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.
- Total Manufacturing Costs + Beginning WIP Inventory Cost - Ending WIP Inventory = COGM
How to Calculate 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:
- Beginning WIP Inventory + Manufacturing Costs - COGM = Ending WIP Inventory
Work-in-Progress Inventory Management
There are certain things that businesses should do to better their management of their Work-in-Progress inventories. Like:
- Speed up production of finished goods, this will avoid you having separate parts and WIPs just sitting around collecting dust
- Forecast better- forecasting sales based on previous data can go a long way in saving money and space in your facility
- Faster shipping, speed up the time you send out products, this will speed lower the amount of WIPs you have sitting around
- Sell extra materials that aren’t being used- extra stock lying around your production facility or warehouse can be an extra cost to your business. Selling the extra materials your business isn’t using can not only get rid of the stock taking up space, but also make a little money on the side.
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.