Work in process (WIP) inventory is a critical financial indicator on a merchant’s balance sheet. It refers to the process wherein raw materials are converted to finished products.
A WIP inventory value is the total cost of all unfinished goods in process. It’s every cost associated with every stage of production, including raw materials, overhead, and labour costs.
This article doesn’t stop, however, at answering the question ‘What is work in process inventory?’ It also gives an explanation why work in process is important, how to enhance it, and how to calculate for it.
Why Is Work In Process Inventory Important?
Work-in-process inventory includes raw materials, work-in-process goods, and finished goods. Work-in-process stock is necessary to keep track of for various reasons, such as:
- It helps you identify bottlenecks in production processes, which can lead to excess inventories or product shortages.
- It helps you calculate your return on investment on capital investments, giving you a better idea of whether investing in new equipment or machinery is worthwhile for your business.
- It can help you determine whether it makes sense to purchase additional supplies from suppliers before these go out of stock, saving you time and money.
How To Enhance Work In Process Inventory Flow
The work in process inventory value is one of the best ways to measure the level of production and profitability. It can give you a sense of how your organisation is spending on raw materials, manufacturing, and other costs. So how can you improve this process?
- Sourcing The Right Supplier
A company’s work in process inventory flow is a critical part of its supply chain. It’s the process that determines how quickly a company can produce and deliver its products to the customers. The workflow process can be optimised by sourcing from the right supplier.
Work in process inventory is a term for unfinished products waiting to be completed. Optimising these products’ flow is crucial because it can increase efficiency and lower costs.
There are many ways to optimize work in process inventory flow. One is to source the right supplier. You need to find a supplier that meets your needs and doesn’t take too much time, money or resources.
- Use A 3PL To Manage Your Inventory
Managing an inventory is an essential part of any supply chain management. It can be challenging to keep up with the demands of a growing business. This is where 3PLs (third-party logistics) come in. They provide warehouse space and inventory management services to help enterprises grow without the risk of inventory overflow.
A 3PL can help with inventory management by providing space for storage, picking and packing and shipping products. It also has software that tracks inventory levels to know when a shipment needs to be made or when an order needs to be fulfilled. A 3PL is a vital link between you and your clients.
How To Calculate Current WIP Inventory
Getting the cost of WIP inventory value is much more complex than just calculating the value of finished goods. This is because there are metrics that need to be considered. As such, before you calculate your business’ current WIP inventory, you want to know these metrics.
- Beginning Work In Process Inventory Cost (Raw Materials)
The first step in calculating a WIP inventory is to find the cost of raw materials. The beginning work in process inventory cost is the cost at which the company begins production. This is also known as the raw materials inventory or the beginning work in process.
- Manufacturing Costs (Production Cost)
The second metric to calculate the current WIP inventory is the manufacturing cost. This is the cost of all raw materials and labor involved in making a product. At this stage, you have products that are unfinished and therefore cannot be sold. Any product that’s at this point of the manufacturing process is factored in here.
The inventory of unfinished work is calculated by determining the total number of units in progress, the materials and labour costs to complete those units, and the cost per unit.
- Cost Of Goods Manufactured
The cost of goods manufactured (COGM) is the total cost incurred to produce the final product. This refers to the final merchandise that’s ready to be sold.
The current WIP Inventory value is calculated by determining the cost of all these metrics.
WIP inventory Formula
(Raw Materials + Production Cost) – COGM (Finished Goods) = End WIP Inventory.
Work in process inventory is an important metric to monitor in the supply chain. It measures how much stock is currently being processed and how much more work remains before it can be completed. A WIP inventory can also help you find ways to improve your supply chain and increase your revenue. You can do that by finding a reliable supplier and engaging the services of 3PL. Being on top of your work in process inventory can help you make better business decisions and keep your clients happy and satisfied.