WIP is a line item on a balance sheet that represents the cost of raw materials, work in progress, and finished goods.
It is the whole cost of manufacturing a product or providing a service, including the price of raw materials, the cost of direct labor at each stage of production, and any additional costs incurred due to the scale of production.
Raw resources in the form of cooking ingredients are transformed into a finished meal through the usage of the aforementioned three cost line items at a restaurant, for instance.
It goes grocery shopping so that a supper can be prepared.
The restaurant must pay its chefs, line cooks, and wait staff in order to produce and serve its food.
The restaurant also invests in insurance and health benefits for its employees to protect itself from liability and keep its staff content.
Monthly rent (or mortgage) payments for the restaurant’s physical location and regular upkeep on the kitchen’s appliances could also be considered capital costs. Overhead costs fall into this category.
As a result, the restaurant’s WIP accounting on the balance sheet will include expenditures associated with cooking ingredients (after they enter the food line assembly), rent, utilities, wages, and insurance.
Items whose production assembly line has not yet begun are not included in WIP costs. WIP costs do not account for things like raw materials that have not yet been used in production.
After an item leaves the manufacturing area, it is no longer considered work in progress and is instead part of the finished goods inventory.
It is challenging to effectively quantify and account for WIP expenses for each product because manufacturing is a dynamic process with several constantly moving pieces.
Instead, businesses have started using a wide variety of approaches to estimate or show WIP accounting in their financial statements.
Just-In-Time (JIT) production, for instance, prioritizes efficiency by maintaining negligible or no stockpiles.
Some businesses routinely use these procedures to convert all of their work-in-process (WIP) items to the finished goods stage before accounting for them.
Companies in the manufacturing sector that have predictable assembly line timings typically report WIP as a percentage.
This proportion is derived from prior estimations of production times and durations of projects.
What is the value of WIP data?
Measurements of production-related metrics can be informed by counts of work-in-progress.
As a result, factory managers can adjust assembly line output to account for fluctuations in the market.
Managers can slow or speed up production depending on whether or not supplies are in storage.
Work in progress is another indicator of supply chain health.
Inefficiency on the manufacturing floor might be indicated by a high ratio of work-in-progress (WIP) items to finished goods (FG).
WIP items incur storage and warehousing fees, which shows up as extra expenses on the balance sheet.
These costs are fixed and cannot be redistributed to other areas of the production facility. That’s why it’s important for businesses to keep their WIP levels as low as they can.
Because work-in-progress inventory in various stages of completion can be converted to finished goods, which may produce a sale profit for the company, WIP is commonly classed as a current asset on a company’s balance sheet.
Time spent in production determines whether or not this stock is included in a company’s balance sheet as an asset or a liability.
Work in progress is a transitional state in the manufacturing cycle.
It occurs before the manufactured goods phase but after the raw materials have been brought in from storage.
As soon as a product is no longer considered work in progress, it is added to the finished goods inventory.
WIP cost is a component of the total cost of goods sold on the balance sheet after the product has been sold.
Take the example of ABC, a major player in the television industry.
A wide variety of electronic components, cathode ray tubes, screens, and packaging supplies are used in its production.
ABC has a stockpile of raw materials worth $100,000 from the previous year, and it spends an additional $300,000 to produce new televisions this year.
Unfinished goods (or items leftover from the planning phase) amount to $150,000 by year’s end. ABC’s stock of raw materials is determined by plugging in these three numbers.
Work-in-progress stock is calculated as follows: Raw material stock (at the beginning of the year) plus purchases made during the year minus unfinished stock.
ABC’s Work in Progress Stock = $200,000 ($100,000 plus $300,000 minus $150,000)
ABC’s assembly line employs five people, all of whom earn $40,000 per year. As a result, ABC’s direct labor expenses are $200,000.
Manufacturing overheads such as employee benefits, insurance, and depreciation of equipment are additional expenses incurred by ABC.
Below is a detailed breakdown of ABC’s operating expenses:
Finished Goods Inventory + Direct Labor + Operating Expenses = Total WIP Costs.
Therefore, ABC’s WIP costs are $582,000 ($250,000 plus $200,000 plus $132,000).