WIP Inventory (Work-in-Progress)

Work-in-Progress or WIP Inventory is defined as the goods in different stages of production. Work in Progress (WIP) Inventory includes products, the material for which has been released from the inventory for the process but the production of which has not yet been completed and is waiting for a final inspection.

Also known as known as a semi-finished good, 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. Sometimes. the accounting system accounts for the semi-finished goods in this category.

• Work-in-Progress (WIP) Inventory is defined as goods in different stages of production and is also known as semi-finished goods.
• WIP is an intermediary process that involves partially processed raw materials being transformed into final products through multiple stages of treatment on the production floor.
• The purpose of WIP is to determine the production cost at each process stage. This excludes the value of raw materials held up in inventory for sale and finished goods inventory held for the anticipation of future sales.

Work-in-progress (WIP) inventory 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 inventory is a widely used term in the supply chain management and production procedure as it denotes the volume of goods, the production of which has begun but they are partially completed. It is recorded under the inventory asset account of the balance sheet. Once the final product is manufactured or produced, the costs associated with the WIP inventories is added to the cost of sales.

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.

The WIP helps have a clear picture of the flow of cost of manufacturing a product from one stage to another. In the balance sheet, the total amount used for bringing a particular product to the specific production stage is calculated. As a result, firms know how much costs have been incurred in completing the production. Accordingly, they determine the sales price for the same.

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

Work in Progress Inventory Formula  = Initial WIP + Manufacturing Costs - Cost of Goods Manufactured

• 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 inventory that is held up for the anticipation of future sales.

Let us consider the following examples to understand the concept and also check how to calculate the work-in-progress or 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 and work in process are terms that seem to have similar meaning. In the supply chain management procedure, these two terms are widely used and sometimes, used synonymously. However, these terms are not synonymous, but share a set of differences.

Let us have a look at the differences below:

• 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 sheet, which comprises labor employed, material in inventory, and manufacturing overhead.

WIP Inventory and finished goods, as the name implies, are two different terms that define products at two different stages. The former signifies a partially produced product, while the latter identifies a product that is complete and ready to be sold in the market.

Let us have a quick look at the differences between them below:

• 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.

This article is a guide to what is WIP Inventory. Here, we explain the concept along with its formula, examples, vs work in process, and vs finished goods. You may learn more about accounting from the following articles –

• Inventories List
• Inventory Ratio
• Formula of Average Inventory
• LIFO Inventory Overview
• Net Realizable Value Formula