Work in process inventory is one of the most important terms in supply chain management, which greatly affects a company’s financial reporting. Through it, the costs of incomplete products are clarified, so it is included in the components of the inventory account in the balance sheet, and most companies seek to try to reduce the value of work in process inventory due to the great difficulty in estimating the percentage of ending the original inventory. In this article, we will provide you with all the details about work in the inventory process, how it is calculated and its impact on your supply chain.
What is work in process inventory?
Work in process inventory is an inventory that includes incomplete products. Or the products those have been completed but partially and still need to continue working on them in order to become finished products.
That is, work in process inventory reflects the products that are involved in the manufacturing or production process, but have not been completed or produced to be a final product ready for distribution and sale.
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The Importance of work in process inventory
The importance of work in process inventory is that it has a significant and direct impact on the balance sheet of any company, especially those that sell customized products.
Whereas, through the accurate calculations of the WIP Inventory, the company will be able to obtain the value or cost of materials and production for their fulfillment process.
Thus having the ability to determine how to divide the cost, and how to calculate the costs at the end of the accounting period.
This helps different companies keep accurate records about their total manufacturing costs, which they will consider when selling their finished goods to customers or retailers.
This is very important and necessary in business management, so companies focus on determining the value of WIP Inventory primarily within their accounts.
We also find that most companies seek to try to reduce the value of work-in-process inventory because of the great difficulty in estimating the percentage of ending inventory origin.
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Calculating work in process inventory
There is a reliable mathematical formula for calculating work in the inventory process, by which companies can determine the cost of unfinished goods. The formula for calculating work-in-process inventory is as follows:
- Work in process inventory = Total Cost of Manufacturing + Beginning Work-in Process Inventory – Ending Work in Process Inventory.
Many companies have difficulty knowing the Cost of Manufacturing directly, but there is a mathematical formula used in calculating the Cost of Manufacturing directly as follows:
- Cost of Manufacturing = Beginning work-in-process Inventory + Ending work in process inventory + Cost of Manufactured Goods.
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Understanding Work-in-Process Inventory for Your Supply Chain
You need to have a thorough understanding of work in process inventory and be able to identify and calculate it, because it is fundamentally important in your supply chain business.
Determining the value of a WIP inventory helps you detect gaps and weaknesses in your supply chain.
It also gives you a real opportunity to identify unnecessary costs and the strength of your suppliers, thus optimizing the value of this inventory and improving your supply chain as a whole.