Trying to manage all the different stages of production can be confusing and overwhelming. If you feel like you lack insight into what’s going on in this stage, it might be because you’re overlooking some key calculations that could help you out. One of those calculations relates to work in progress inventory. Knowing this number goes a long way towards eliminating inefficiencies and optimizing your production process to save you money and satisfy your customers. 

What Is Work in Progress Inventory?

Work in progress inventory, or WIP for short, refers to the total cost of unfinished goods that are currently in production. This calculation typically includes the cost of raw materials being used, a portion of the labor, and a portion of the factory overhead to get a good idea of what costs have been covered thus far in production and what costs can be expected in the future. This concept is a key component of effective supply chain management as it concerns the process that transforms raw materials into final products. 

How Does It Differ From Work in Process Inventory?

In many cases, the terms “work in process” and “work in progress” are used interchangeably. However, they can occasionally have different meanings depending on the industry and the context. For example, work in process usually refers to converting raw materials into finished goods that occur over a short timeframe. On the other hand, work in progress may be used in construction and service industries, referring to the progress of a specific project to analyze the cost of the project compared to the percentage completion. 

However, in most cases, especially when it comes to businesses that sell physical products to customers, “work in process” and “work in progress” are interchangeable and refer to the same thing. 

Factors to Know Before Calculating Work in Progress Inventory

Even though calculating work in progress inventory involves using a formula, it might be a little bit confusing to just throw a formula at you with no introduction. Instead, we are going first to explain the different factors needed to calculate work in progress inventory (WIP) before moving on to the actual calculation.

  • Beginning work in progress inventory cost: This component involves taking the ending WIP cost from your balance sheet and simply transferring it to the new period as your beginning WIP.

  • Manufacturing costs: This component involves calculating all the costs associated with manufacturing your products. Your manufacturing costs consist of raw materials, labor, and overhead costs added together to get a final number.

  • Cost of goods manufactured: Also referred to as COGM, this component involves calculating the total cost of manufacturing a final product. COGM is calculated by adding your total manufacturing costs with your beginning WIP inventory. From there, you subtract the ending WIP inventory in order to get your COGM. 

Now that you know the necessary components, it’s time to move on to the fun part — calculations! Even if you aren’t a math whiz, we are here to help you figure this out. 

How to Calculate Work in Progress Inventory?

Work in progress for inventory needs to be calculated and added as an asset to your company’s balance sheet. But how do you calculate work in progress inventory? Once you have the basic factors down, you simply need to find your numbers and plug them into a formula! 

The formula is as follows: Starting work in progress (WIP) inventory + manufacturing costs - the cost of manufactured goods (COGM)

While formulas are nice, it’s better to have an actual example with real numbers to show you how this plays out in practice. So let’s say a company produces candles. At the beginning of the year, the candle company has $20,000 in raw materials to make their candles, jars, wax, wicks, etc. Over the course of the year, the candle company spends $150,000 on manufacturing costs. All this time and money has produced 10,000 candles that were sold for $10 apiece, amounting to $100,000. 

Based on this information, you would add the WIP ($20,000) to the manufacturing costs ($150,000) to get $170,000. From there, you would subtract that $170,000 from the COGM ($100,000) to get a WIP of $70,000 for the candle company. 

Hopefully, this example is helpful and shows you exactly what you need to do to calculate your WIP. That being said, you definitely don’t want to constantly be doing calculations in order to run your business — you’re a business owner, not a mathematician. 

This is why it’s recommended that you only calculate WIP at the end of a specific reporting period, like the quarter, period, or year, to make things easier on yourself. You definitely need to find a happy medium when it comes to calculating WIP — you don’t want to do it too little, but you also don’t want to do it too frequently. Simply find a process that works for your business and stick to it. 

What to Do About Your Work in Progress Inventory?

Now that you have your WIP calculations, you need to know what to do with them! After all, there has to be a purpose for doing all this work -- and there is. First of all, WIP is a key component of your balance sheet since it’s an asset. If you don’t calculate your WIP, you could end up undervaluing your inventory and overstating your cost of goods. Obviously, you want your balance sheet to be 100% accurate, so WIP is just an essential component of this. 

On the other hand, WIP is an essential part of supply chain management that can help you identify potential problems in your production process. For example, if you consistently have high WIP values, this could potentially indicate a problem in the process, such as a bottleneck or another inefficiency. Thanks to your WIP calculations, you can clearly see this problem and take steps to solve it before it gets worse and ends up costing you money. 

Finally, WIP gives you important insight into project management. For example, this information can help project managers budget for a product, the bill for a project, and proactively identify issues along the way. When it comes to business, knowledge is power and WIP is definitely a piece of knowledge that you want to have handy. 

Other Supply Chain Management Tips to Help Your Business

While WIP is a key component of supply chain management, there are other components that are worth discussing if you’re really looking to implement a seamless process. Here are some other tips, tricks, and best practices so that you can master this area and focus on other parts of your business:

  • Use technology to your advantage: One of the best things you can do to improve your supply chain management is to incorporate technology where needed. As you now know, WIP is simply one calculation that you need to effectively manage production and inventory. However, there are countless others that would take a long time to perform regularly on your own. This is where technology comes into play. It can do all this hard work for you and use artificial intelligence to optimize potential problem areas before they actually develop. Overall, investing in supply chain management software is an investment for your business and should be treated as such with thorough research and testing to ensure the right fit.

  • Build your relationships: It’s called a supply “chain” for a reason. One weak link in the chain can derail the entire process! This is why you need to really build your relationships with suppliers by utilizing clear and straightforward communication on both sides of the deal.

  • Go green where you can: This is an area that consumers are increasingly invested in and it’s a great opportunity for your business to set itself apart in terms of its dedication to the environment. One area where you can really implement this quickly and relatively easily is the packaging. For example, corrugated cardboard packaging can be easily recycled. On the other hand, things like packing peanuts cannot be recycled and are horrible for the environment. Instead, consider greener packaging options such as recycled filler paper, recycled air pillows, or corrugated bubble wrap. 

Final Thoughts on Work in Progress Inventory

Work in progress inventory is an important part of supply chain management. Consistently calculating this value can help keep your production process on-track and free of issues. If issues come up, it can provide you with the insight you need to take appropriate action to solve them. At the end of the day, you need to use every tool available to run your business efficiently, and WIP is simply one part of the equation.  

 

Sources:

  1. https://www.indeed.com/career-advice/career-development/what-is-supply-chain-management-and-why-is-it-important
  2. https://www.inc.com/cox-business/how-to-choose-the-right-technology-for-your-small-business-or-startup.html
  3. https://www.environmentalleader.com/2020/04/new-report-finds-overwhelming-majority-of-consumers-are-willing-to-pay-more-for-sustainable-packaging/

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