Work in Process Inventory: Meaning, Formula, Calculation & Examples The work-in-progress inventory is a major component of the manufacturing companies that reflects products under consideration of entering the production process but being unfinished. Work-in-progress inventory needs to be managed by companies to maintain an eye on their cost of manufacturing and maximize the effectiveness of their own manufacturing process. This article will tell you everything you want to know about WIP inventory, such as calculations, examples, and tips on how to manage it correctly. What Is Work in Process (WIP) Inventory? WIP inventory refers to the semi-manufactured products that are being produced. They have initiated their production but have not yet sold out to the customers. Work in process inventory in manufacturing carries partially worked raw material, finished goods awaiting completion, and goods awaiting quality tests. In contrast to merchandise held for sale, WIP inventory is the cost of materials, labor, and overheads that have already been paid on goods still in the process of further processing. For instance, let’s take a furniture manufacturer that makes chairs. The work in process inventory could be chair frames awaiting cushions, for paint, or assembly. They are no longer raw materials but yet to be complete products. Components of WIP Inventory Work in process inventory is identified three key cost components: Raw Materials These are raw materials removed from stock and put on products in production. Putting raw materials into production puts them into the WIP inventory until the final product. Direct Labor This entails salaries to those workers directly involved in the production of the products. Work in process inventory cost flow must account for the time workers spend working on each of the products as it is shifted from stage to stage of production. Manufacturing Overhead These are indirect costs such as factory rent, utility costs, equipment maintenance, and wages for supervisors. These are applied to all the products that are under production and also in the WIP inventory valuation. Formula for Calculating WIP Inventory The simple work-in-progress inventory formula is: WIP Inventory = Beginning WIP + Raw Materials Used + Direct Labor + Manufacturing Overhead – Cost of Goods Manufactured The above equation assists you in the work in process inventory calculation of the value of goods in process at the end of a given time period. Alternative Formula Alternatively, calculate WIP inventory with: Ending WIP Inventory = Beginning WIP Inventory + Total Manufacturing Costs – Cost of Goods Manufactured Both the above equations provide the same amount and assist in work in process inventory calculation. How to Calculate WIP Inventory? Let us divide the work in process inventory calculation into easy-to-understand steps: Step 1: Calculate Beginning WIP Inventory Beginning work in process inventory is the quantity of goods that are in the process of production at the beginning of the period you are calculating. Step 2: Add Costs of Manufacturing Add all the costs that were incurred during the period: Raw material used during manufacturing Direct labor wages Manufacturing overheads Step 3: Subtract Cost of Goods Manufactured This is the value of total goods completed within the period. Step 4: Calculate Ending WIP Ending work in process inventory is equal to starting WIP plus additional costs minus completed goods cost. Practical Example of Calculation A work in process inventory example is shown below: Beginning work in process inventory: $50,000 Raw materials used: $80,000 Direct labor: $40,000 Manufacturing overhead: $30,000 Cost of goods manufactured: $120,000 Work in process inventory calculation: WIP = $50,000 + $80,000 + $40,000 + $30,000 – $120,000 = $80,000 This indicates that you have $80,000 of work in process inventory at the end of the period.  Book Your Free Marketing Consultation  Importance of WIP Inventory Management Cost Control Prompt work in process inventory management allows companies to maintain cost of production within control by monitoring precisely how much money is spent on work in progress. This information assists managers to utilize resources more efficiently. Cash Flow Management Increased levels of WIP have more funds locked up in the production process. With work in process inventory turnover management, businesses are able to maximize cash flow and have fewer funds tied up in incomplete products. Production Planning Understanding the amount of WIP enables production schedules to be better planned by managers. Too high of work in process inventory can indicate that the production is being carried out at a rate that is too slow or there is a bottleneck in the process. Financial Reporting Work in process inventory accounting must yield accurate financial statements. WIP inventory must be treated as a current asset on the company’s balance sheet. Practical Examples of WIP Inventory Example 1: Manufacturing of Cars 100 cars are at various stages of manufacturing: Chassis assembly: $15,000 per car Engine installation: $25,000 per car Interior fitting: $35,000 per car Quality checking: $40,000 per car Assume there are 100 units at every stage. Total work in process inventory is $11,500,000. Example 2: Food Processing A bakery producing bread has: Initial work in process inventory: $5,000 Used ingredients and flour: $20,000 Baker wages: $8,000 Utility and oven rental fees: $3,000 Cost of finished bread: $25,000 Ending work in process inventory = $5,000 + $20,000 + $8,000 + $3,000 – $25,000 = $11,000 Example 3: Textiles Production A clothing company monitors WIP through the following steps: Cutting cloth Sewing Inspection for quality Preparing for packaging Each process brings overhead and labor cost to the value of work in process inventory. Work in Process Journal Entry Work in process inventory journal entry is normally prepared for: When raw material is placed into production: Debit: Work in Process Inventory Credit: Raw Materials Inventory When directly applied to labor: Debit: Work in Process Inventory Credit: Wages Payable When directly applied to produce overhead: Debit: Work in Process Inventory Credit: Manufacturing Overhead When the products are complete: Debit: Work in Process Inventory Credit: Finished Goods Inventory Improving WIP Inventory Turnover Work in process inventory turnover is an indicator of how efficiently the