What Is Work in Process (WIP) Inventory?

Work in process (WIP) inventory refers to goods that are in process but not yet completed. For supply chain management, WIP inventory includes all costs associated with products that are in production, such as overhead, labor, and raw materials.

You must know your work in process inventory in order to have an accurate view of your overall costs. Once you understand the flow of WIP inventory, you can assess how efficient your business is at producing finished products. If you use a third-party manufacturer, you can evaluate how efficient they are at doing so.

Work in Process Inventory Defined

Work in process inventory is essentially all of a company’s unfinished goods and all the costs associated with them. It includes all inventory types from raw materials to finished products.

WIP inventory takes up warehouse space, and it’s not in a condition to be sold. As a result, businesses want to keep their WIP inventory low. More WIP inventory means less storage space and more risk of goods expiring or becoming dated.

Work in Process Inventory vs. Work in Progress Inventory

Though they sound similar and are often used interchangeably, work in process and work in progress technically describe two slightly different things. Work in process refers to the costs of unfinished goods, whereas work in progress refers to partially completed goods.

Both terms are abbreviated as WIP inventory. Though there is a slight differentiation, it’s common for companies to use both work in process and work in progress to refer to the same things.

How WIP Affects Your Balance Sheet

Work in process inventory is an asset. It is generally placed with the inventory line item in your balance sheet. 

Your WIP inventory cost will be initially based on the prior accounting period’s number. You’ll carry this over to the new balance sheet.

Your WIP inventory is different than your finished goods inventory. Finished goods are ready for sale, so they will be added to the finished goods line of your inventory accounting. Once sold, they will be moved to sales.

How to Calculate Your Work in Process Inventory

You need to know your WIP inventory to effectively direct and improve your supply chain and inventory management. This number is also crucial to the valuation of your business since it is an asset but it’s not as liquid as other forms of collateral. All this factors into how lenders value your company. 

WIP Inventory Formula

To calculate your work in process inventory, you need to know your starting WIP inventory, production costs, and finished goods costs. Here’s the formula to calculate your WIP inventory:

Starting WIP inventory + production costs – finished goods cost = ending WIP inventory

Calculation Example

Let’s say your business has $20,000 in raw materials and incurs $200,000 in production costs. Your finished goods cost is $100,000. Your WIP inventory calculation would look like this:

($20,000 + $200,000) – $100,000 = $120,000

Your WIP inventory is $120,000. This means your business has $120,000 in inventory that is not finished goods or raw materials. 

Remember that this calculation only gives you an estimate rather than a final number. It doesn’t factor in every contingency in the production process, such as spoilage or downtime. If you want a wholly accurate number, you’ll need to break out every one of these factors in the production process.

How to Gauge WIP Inventory

Ultimately, you want your WIP inventory to be relatively steady. This is a sign of efficient production operations. If it swings widely, it’s a sign that things aren’t running smoothly. 

If your WIP inventory grows without a parallel growth in sales, it’s a sign of problems in the production process. Think of your WIP inventory in relation to sales, and use this as a benchmark for evaluation.

How to Improve WIP Inventory Flow

If you’re noticing fluctuations in your WIP inventory that don’t tie to sales, look for areas for improvement. 

Technology like warehouse management software and inventory management software can help you to avoid logjams in the production process and ensure you have adequate raw materials on hand. These software solutions can also help you to forecast demand, ensuring the production process runs smoothly without delays. With accurate forecasting, you can communicate with suppliers well and ensure you have supplies ready.

When you have the data on your WIP inventory, you can spot places where you can tighten operations and optimize your supply chain. This increased efficiency means lower costs and more revenue.

Logistipedia Can Help With Work in Process Inventory

At Logistipedia, we help businesses manage their production, supply chain, fulfillment, warehouse management, shipping, and distribution processes, giving them the information they need to maximize their operations. Let us help you get started on a path to smoother operations today. 

References

Work-in-Progress (WIP). (May 2022). Investopedia.

Work in Progress vs. Work in Process: What’s the Difference? (August 2021). Investopedia.