Work in Process Inventory Guide + WIP Inventory Formula

work in process

For accounting purposes, process costing differs from job costing, which is a method used when each customer’s job is different. The terms work in progress and work in process are usually treated as synonyms. Work in process may refer specifically to products that are completed in a short time.

  • Or, it can be automatically kept up to date by using manufacturing software like an MRP system.
  • The beginning work in process inventory cost is the cost at which the company begins production.
  • Having too much WIP inventory on-hand can be an indication of bottlenecks in your manufacturing or procurement process.
  • While larger companies can absorb a few more errors due to scale and averaging, small and medium-sized companies often have little to no room for error.

A construction company, for example, may bill a company based on various stages of the project, where it may bill when it is 25% or 50% completed, and so forth. bookkeeping for startups is an asset account used to report inventory items not yet completed. A company has started taking raw materials and converting them to a finished product to sell. However, that final product is not yet done and is not yet ready for sale.


Some people consider Work in Process as an extension of the Work in Progress assumptions, while others use these phrases interchangeably.

work in process

Work in progress is then taken to mean production that takes considerable time, such as a construction project. COGM can be determined by adding the total manufacturing costs to the beginning WIP inventory, followed by subtracting the ending WIP inventory. COGM is defined as the total costs incurred while creating a finished product, and in order to estimate the value of a company’s end-of-period WIP, the finished COGM is a necessary input.

Work in progress vs work in process

With Katana, you can track WIP inventory levels at each stage of the production process. This information is updated in real time, showing exactly how much WIP you have on hand, where it is located, and what stage of the production process it is in. Katana’s manufacturing ERP also provides tools to help you manage your WIP inventory effectively, such as the ability to set reorder points, so you know when WIP levels reach a certain threshold. The first step in calculating a WIP inventory is to find the cost of raw materials.

  • The most effective way of doing it is utilizing a software system like an ERP that allows you to track WIP inventory.
  • The second metric to calculate the current WIP inventory is the manufacturing cost.
  • This straightforward explanation of what is WIP (Work in Process) Inventory includes a step-by-step formula and explanation of the place of WIP inventory in the end-to-end supply chain.
  • Most ecommerce businesses rely on a supplier or manufacturer for sellable inventory.
  • This is because inflated WIP ties up capital and may inflate the tax burden.
  • This helps you build more accurate forecasts to communicate with suppliers and freight forwarders more efficiently.

In other words, WIP is the part of a company’s overall inventory that has begun being processed but is not yet finished. In accounting, WIP is an asset and designates the value of unfinished goods at the end of a financial period. Work in progress (WIP), also called work in process, is inventory that has begun the manufacturing process and is no longer included in raw materials inventory, but is not yet a completed product. On a balance sheet, work in progress is considered to be an asset because money has been spent towards a completed product. Because the product has not been completed, however, WIP is valued  lower.

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WIP is calculated as a sum of WIP inventory, total direct labor costs, and allocated overhead costs. WIP accounting also does not include costs for finished items, which are classified as finished goods inventory after they have moved past the production floor. I use the term “work-in-process” to mean a manufacturer’s inventory that is not yet completed. I think of work-in-process as the goods that are on the factory floor of a manufacturer. The amount of Work-in-Process Inventory would be reported along with Raw Materials Inventory and Finished Goods Inventory on the manufacturer’s balance sheet as a current asset. The cost of purchasing a product factors into what it costs to make it (e.g., raw materials, labor, and production).