What is WIP Inventory (Work in Progress)?
WIP Inventory (Work-in-Progress) is defined as the goods which are in different stages of production. Work in Progress (WIP) Inventory includes material that has been released from the inventory for the process but not yet completed and is waiting for a final inspection. Sometimes the accounting system accounts for the semi-finished goods in this category.
- Work in progress is also known as a semi-finished good.
- It is an intermediary process, where raw materials are taken out from the store and put into the conversion process to obtain final products, or we can say that these are the partially processed raw materials which are being processed on the production floor after following multiple stages of treatment where they have been transformed into the final product.
- WIP is one of the essential components of the inventory asset, which is an account on the balance sheet. And, these production costs to the finished goods are subsequentially added up to the final product and eventually to cost of sales.
Calculation of Ending WIP inventory
The calculation of ending work in progress can be done as per below
- The purpose of the WIP to figure out the production cost at each stage of the process. And this excludes the value of raw materials that are being held up in the inventory for sale.
- Apart from it, the WIP figure also excludes the value of the finished goods inventory that is held up for the anticipation of future sales.
Examples of WIP Inventory
Below are some of the examples of Work in Progress (WIP) Inventory.
WIP Inventory – Example #1
Consider a car manufacturer that assembles cars. It passes through multiple work stations for a different operation to perform systematically after finishing and painting. It rolls out to the inventory. As the cars move from one department to another, more costs are added to production.
WIP Inventory – Example #2
Let’s assume a company ABC manufacture certain widgets. And it manufactures one widget in two weeks. On the closing day of the month, when the company was accounting the availability of widget in its inventory and sees that it had only 10,000 widgets and out of these 4,000 were partially completed widgets These partially completed widgets recorded as a work in process widgets on the left-hand side of the balance sheet (which was considered it to be an asset for the company).
WIP Inventory – Example #3
Suppose the XYZ widget company has an initial WIP inventory of $10,000 for the year. During the span of the time, the company incurs manufacturing costs of $250,000 and produces finished goods from the raw material costing $ 240,000. If we calculate the overall WIP inventory of the company is 10,000, plus $250,000 minus $240,000. It leaves the outstanding inventory of the process is $20,000.
Work in Progress Inventory vs. Work in Process
- Work in the process represents partially completed goods, or in other terms, these goods refer to be goods – in- process. For a short period, work in the process also considers being a product that is moving to the finished product from raw materials. The best example of work in the process is manufactured goods.
- Work in progress is a term referring to assets that require a sufficient amount of time for completion of the manufacturing process, such as shipbuilding or construction projects. But, this difference is not sufficient to justify the predefined norms, so in such a situation, we consider the unfinished product is a part of the work in process. This inventory is found on a manufacturing company’s balance sheetCompany's Balance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company., which comprises of labor employed, a material in inventory, and manufacturing overhead.
Work in Progress Inventory vs. Finished Good
- The difference between the work-in-process and finished goods is based on the inventory’s stage of completion, which defines how readily the goodwill sale it out. WIP speaks much more about the intermediary stages of the completion of the good in inventory. In which inventory has started to progress from the raw material to the final finished product through different phases of development or assembly. While finished good refers to the final stage of completion where all the required operations are done and waiting for the next subsequent stage, i.e., sale to a customer.
- As such, the difference between work in progress and finished goods is a measure of completion of the inventory stage from the raw material. In comparison, WIP and finished goods refer to the intermediary and final stages of an inventory life cycle, respectively.
The major concern of the manufacturing companies is keeping its production at optimal levels. To keep things at optimal levels means that the company can efficiently minimize its WIP. It figures out only those values which are at the intermediate production stage. And excludes the value of raw material that is not considered to be a part of sales. WIP also excludes the value of the finished product that is anticipated to be future sales.
This article has been a guide to WIP Inventory and its definition. Here we discuss how to calculate work-in-progress inventory along with examples and its differences with finished goods and work in process. You may learn more about accounting from the following articles –