Work In Process

Published by admin | Filed under Basic

The definition of Work-in-Process, otherwise known as WIP, is the unfinished items in the process towards a final product. Work in Process can be treated like any other kind of inventory, in that it takes up storage space and is a working capital burden on the company. In supply chain management, Just in Time Production is used to keep the amount of WIP to the minimum.

To calculate the WIP Days, you need to take the average WIP inventory you have for a certain period of time, divide by your sales during that time period, and then multiple by the amount of days used in this calculation. Usually the formula for WIP goes like this:

WIP Days= (WIP Average/Sales for the whole year)*365

Just like inventory days, you can use WIP days to set targets for your factories.

Calculating the Work in Process itself is slightly more tricky and often times not entirely correct, here is a guide from the site eHow:

Step 1

Move raw materials from the raw material inventory account to the work in process account as they are moved into the production area.

Step 2

Record the raw materials used in the work in progress account, direct labor and manufacturing overhead rates as they apply to each step of the manufacturing process.

Step 3

Know all of the processes and where raw materials are added. For example, are all the materials added in during step one? If so, then 100 percent of material cost would be complete when calculating work in process. Are materials added in equally throughout the production process? Find the average of completion as indicated in the following steps. Is one step in the production line more labor intensive than another or are they evenly distributed? Should more overhead be applied to one step because of the heavy equipment used? Are labor and overhead applied equally throughout the manufacturing process? Knowing the answers to these questions will help you determine whether your work in process goods are 25, 50, or 75 percent complete. You need this estimated percentage to calculate work in process.

Step 4

Use the subjective assessment of the production manager for a rough estimate of completion percentage of the manufactured goods. The beginning balance of the work in process account is from the prior period’s work. You will add this period’s goods that are started but not yet finished to the work in process account. Then subtract the work that was finished this period for the work in process (WIP) account balance for this period.

Step 5

Multiply the quantity of pieces that are in the manufacturing process but not finished by the percentage that they are complete. For our example, each step of A manufacturing process adds an equal amount of labor and overhead. Approximately one-third of the goods are 25 percent complete, one-third are 50 percent complete, and one-third are 75 percent complete.

Step 6

Average the percentages of completion of work in process goods. In the example, the average percentage of completion is 50 percent for processes ((25+50+75)/3=50). Multiply the number of goods in process times and divide by the number of different completion times to get the completion percentage of 50 percent. Say, for example, that there are 1000 pieces of work in process that are an average of 50 percent complete. Then their equivalent value is the same as 500 finished goods.

Step 7

Multiply the 500 equivalent finished pieces by the individual total cost of that finished good. This number is your work in process value for the current accounting period.

Essentially, you should try to keep Work-in-process to a minimum while at the same time ensuring that there is enough to produce goods in time for customers. Naturally, the bigger your WIP, the bigger your inventory  resulting in higher working capital costs and less flexible cash flow.