What is Work in Process Inventory? eCommerce Inventory Costs

In most cases, accountants consider the percentage of total raw material, labor, and overhead costs that have been incurred to determine the number of partially completed units in WIP. The cost of raw materials is the first cost incurred in this process because materials are required before any labor costs can be incurred. Work in process inventory refers to the total cost of unfinished goods currently in the production process at the end of each accounting period. It is also considered a current asset on a company’s balance sheet. When it comes to accounting for work in process inventory, WIP is considered a current asset, and is therefore combined with the inventory line item on the balance sheet.

Accounting techniques are used to manage inventory and financial matters – how much money a company has tied up within inventory of produced goods, raw materials, parts, components, etc. These techniques manage assumptions of cost flows related to inventory and stock repurchases. Because it represents an “in-between” stage, classified as neither raw materials nor finished goods, work in process inventory can sometimes be overlooked.

Boundless Accounting

The accountant can then compare the real-world data with the financial metrics to make sure everything checks out. 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.

• Then you find that you have invested $225,000 in production costs for the quarter, and the total value of your finished goods is $215,000.
• Direct Labor – includes the wages of the workers who are actually sewing the hats or operating the machinery.
• Often, this is the case when the manufacturing operation is short enough to allow all work in process to be completed when the period ends and current accounts are closed.
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Accurate accounting is also important for financial reporting, and WIP is a crucial part of the balance sheet. Accurate WIP accounting provides a clear picture of a company’s financial health and sends the right message to investors, lenders, and stakeholders. At the beginning of the accounting period in March, Superior Glass had $7,000 in the WIP inventory account. Then you find that you have invested $225,000 in production costs for the quarter, and the total value of your finished goods is $215,000. In all three of these scenarios, you have unfinished goods at some stage of the process. Continue reading to learn exactly what is WIP inventory, how to calculate it, why it matters, and how it fits into a healthy supply chain.

Work in process inventory formula

This factor is also something banks and lenders look at when you’re applying for a loan. While WIP is considered a current asset, it isn’t particularly liquid and isn’t work in process inventory includes immediately available for sale. Secondly, the processing of raw materials throughout a product’s routing transforms them into new components and sub-assemblies.