What is WIP Inventory (Work in Progress)?

WIP Inventory (Work-in-Progress) is defined as the goods in different stages of production. Work in Progress (WIP) Inventory includes material that has been released from the inventory for the process but has not yet been completed and is waiting for a final inspection. Sometimes the accounting system accounts for the semi-finished goods in this category.

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  • 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 that 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 subsequently added up to the final product and eventually to the cost of sales.

Calculation of Ending WIP inventory

The calculation of ending work in progress can be done as below

  • The purpose of the WIP is 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.The WIP figure also excludes the value of the finished goods inventoryFinished Goods InventoryFinished goods inventory refers to the final products acquired from the manufacturing process or through merchandise. It is the end product of the company, which is ready to be sold in the market. read more that is held up for the anticipation of future sales.

Examples of WIP Inventory

Below are some examples of the Work in Progress (WIP) Inventory.

WIP Inventory – Example #1

Consider a car manufacturer that assembles cars. It passes through multiple workstations for a different operation to perform systematically after finishing and painting. Then, 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, manufactures certain widgets. And it manufactures one widget in two weeks. Then, on the closing day of the month, the company was accounting for the availability of widgets in its inventory and saw that it had only 10,000 widgets. Out of these, 4,000 were partially completed widgets. These partially completed widgets were recorded as work in process widgets on the left-hand side of the balance sheet (which was considered 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 at $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 is also considered a product moving to the finished product from raw materials. The best example of work in the process is manufactured goods.Work in progress refers to assets that require a sufficient amount of time to complete 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 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.read more, which comprises labor employed, 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 goodwill sells it out. WIP speaks much more about the intermediary stages of completing the goods in inventory. Inventory has started to progress from the raw material to the final finished product through different phases of development or assembly. While finished goods 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.The difference between work in progress and finished goods is a measure of completion of the inventory stage from the raw material. WIP and finished goods refer to the intermediary and final stages of an inventory life cycle, respectively.

Conclusion

The major concern of the manufacturing companies is keeping their 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 part of sales. WIP also excludes the value of the finished product that is anticipated to be future sales.

This article is a guide to WIP Inventory and its definition. Here we discuss how to calculate work-in-progress inventory, examples, and the differences between finished goods and work in process. You may learn more about accounting from the following articles –

  • Inventories ListInventory RatioFormula of Average InventoryLIFO Inventory OverviewNet Realizable Value Formula