How to Calculate Manufacturing Work in Progress (WIP)

Let us take the company ABC which manufactures’ widgets. Considering that it takes two weeks to make a widget. By the end of the month on the last day when the company closes its account, it is observed that there are only 10000 widgets in its inventory. There are only 3000 partially completed widgets. Then on the left-hand side of the balance sheet, these 3000 partially completed widgets are recorded as work in progress and are considered as an asset to the company.

Thus a manufacturing firm incurs costs as it transforms materials into work in process and later to finished product. During the manufacturing process, the manufacturing firm consumes raw materials, labor, and factory overhead costs to create both partially completed and fully completed units of inventory. The cost of manufacturing is considered in the raw materials account, the work in progress account. This is also known as work in process or finished products account. To the inventory accounts, the inventory costs are debited till the manufacturing process is completed or the inventory is sold completely.

1. To determine the cost of beginning work in progress for the accounting period. During a production process, the work-in-process refers to raw materials inventory that has been only partially converted into a finished product. The work-in-process inventory undergoes additional processing to convert into finished products.
2. Costs of the raw inventory costs are calculated for the accounting period. At the beginning of the accounting period, the cost of raw materials inventory is added to the cost of purchased materials for the period to determine the total cost of raw material inventory. Deduct the cost of raw materials from this figure that is on hand at the end of the accounting period to determine the costs of materials consumed during the accounting period.
3. The labor costs for the accounting period should be calculated.
4. The factory overhead costs can be calculated for the accounting period. This includes calculations like rent, depreciation costs, taxes, and insurance.
5. During the accounting period, the manufacturing cost is calculated. The raw material inventory costs, labor costs, and factory overhead costs are added together and then the calculation is done.
6. For the accounting period the cost of ending work in process is calculated. The manufacturing costs are added to the beginning of the work in process.
7. Using this formula rework and scrap or accounting errors may impact the validity of the ending work in progress. Thus a physical work-in-progress inventory can be performed to obtain a more accurate ending work in progress.

Work in progress can be stated as the concept used to describe the flow of manufacturing costs from one area of production to the next and the balance in WIP denotes all production costs incurred for partially completed goods. Materials and labor costs are included in production costs and are used in making goods as well as allocated overhead. Along with other inventory accounts, WIP is determined by various accounting methods across different companies. Thus investors should recognize how a company is measuring the WIP and other inventory accounts.

The work in progress of the two companies may not be the same or comparable. It depends on the allocations of overhead on man-hours or machine-hours. Register at SolutionBuggy to find Manufacturing consultants/experts in a quick time and get your projects done.