What Is Work in Process (WIP)?

Posted at September 3, 2020 » By : » Categories : Business Management »
work in process

Are you looking for ways to improve your company’s manufacturing process? If you’ve never heard of the term “work in process”, you may be wondering what the difference between work in process and work in progress are.

By identifying the differences between these two manufacturing terms often referred to as WIP, you will maintain a constant WIP level within your business.

Today, we’ve created this complete guide to help you understand the importance of work in process inventory. We also tell you why you need to know the difference between work in progress and work in process inventory. Keep reading to learn more!

What Does Work in Process Mean?

The term “work in process” refers to goods that have been partially completed. You may have also commonly heard these types of goods referred to as goods in process.

Work in process inventory is that which has entered into the manufacturing process but isn’t included in the inventory of raw materials. However, this inventory is yet to be considered a finalized product.

When someone is referring to work in process products, they’re identifying the products that have moved from raw material, to a completed product in a short period of time.

What Is the Difference Between Work In Process Versus Work In Progress?

A work in progress is the term used to refer to assets that require a large amount of time to be completed. One example of a work in progress project would be a construction project.

You can find work in progress inventory on the balance sheet of the manufacturer. You should be able to identify the material, direct labor, and the manufacturing overhead of work in progress items.

What Is WIP?

Both work in progress and work in process are commonly referred to as WIP and is one of the items that you will find on a balance sheet. This figure will identify the value of the products that are in the intermediate stage of production. However, you won’t find the real value of any materials that haven’t been incorporated into the intermediate production stage.

Also, work in progress will also exclude the value of any finalized products being held in inventory. Many companies attempt to eliminate or reduce their work in progress inventory. This elimination is completed near the end of the reporting period to help make accounting a lot simpler.

Without having to account for work in progress products, the assets that a company has will be raw materials or finished goods. This process makes it a lot simpler for accounting.

How Do You Calculate Work in Process?

Calculating work in process is essential for any company, as it tells investors how much a company has in production. Potential investors will be able to total the number in production and compare it to the finished goods a company has available. Investors will also be able to determine what the cost of goods sold for each quarter to identify if a company is a good investment not.

Breaking Down Overhead Costs

The first step that needs to be taken to calculate work in process is to break down all the costs that come with manufacturing. All of these costs will not directly be related to manufacturing, but still play a vital role in how much profit a company is expected to see.

Some of the things that you may want to consider adding into overhead costs include:

  • Rent
  • Utilities
  • Taxes
  • Insurance
  • Administrative expenses
  • Payroll
  • Marketing expenses

You may need to hire an accountant to help you calculate these overhead costs and to make sure your numbers are accurate.

Breaking down the work in process formula is important for inventory management. By counting the goods that are in the work in process stage, a manufacturer will have a better and more accurate idea of how much additional inventory needs to be produced.

In addition, it will also give the manufacturer an estimate of expected production necessary to meet demand for the current quarter as well as the next quarter.

Why Does Work in Progress Matter for Work in Process?

Work in progress is in the middle of your manufacturing process. It is the determination between your raw materials and a finalized product. While work in progress inventory doesn’t mean as much as the finished goods for your sales prices, it does mean that it’s worth more than any raw materials that your business has.

Looking at the bare work in process numbers that you have won’t tell you much if you also don’t look at your work in progress statistics. Identifying changes in your work in progress will outline any important information about your company.

Some of the information that you will be able to gather by looking at your work in progress statistics includes the number of orders that have been received and how long it takes your company to get its finished products to its customers.

Identifying these numbers will help you to get a better understanding of your production process and if it could benefit from any improvements made to it. Another thing that you will be able to identify from these numbers is if you need to hire additional labor to help keep up with demand. You may find that you also need to raise your working capital to help keep up with the costs of an increase in demand.

Understanding the Importance of Work in Process Inventory

By identifying the difference between work in process inventory and work in progress inventory, you’ll help to improve your company’s production capabilities. Both of these terms are listed on a company’s balance sheet. You will get a better idea of what inventory has moved from raw materials into a finalized product.

Are you interested in learning more about increasing your cash flow and better understanding your company’s finances? We’re here to help you. Click here to apply today!