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How to calculate opening work in progress?

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Answer # 1 #

It is calculated as a sum of the following three elements used to fashion a product or service: cost of materials used in the production process, labor expenses for the product as it moves through partial completion stages, and overhead costs incurred in making the final product.

For example, a restaurant uses the three cost line items mentioned above to transform raw materials, in the form of cooking ingredients, into a finished meal.

It buys vegetables, meat, and spices to prepare a meal.

Labor costs for the restaurant are salaries for chefs and line (to make the dishes) and wait staff (to deliver it to customers).

To protect itself against untoward incidents and keep its workers happy, the restaurant’s owners also spend on insurance and health benefits.

The restaurant may also have capital costs like monthly rent (or mortgage) payments for its premises and maintenance on equipment used to make food. These expenses are classified as overhead.

The WIP accounting on the restaurant’s balance sheet, therefore, will be a sum of entries for the costs of cooking ingredients (once they enter the food line assembly), facility expenses, employee salaries and benefits, and insurance costs.

WIP accounting does not include costs for items that have not entered the production assembly line. For example, raw materials that are still placed in factory stores are not included in WIP costs.

WIP accounting also does not include costs for finished items, which are classified as finished goods inventory after they have moved past the production floor.

Since manufacturing is a dynamic process of multiple constantly-moving parts, it is difficult to accurately calculate and account for WIP costs for each product.

Instead, companies have adopted various methods to estimate or present WIP accounting in their balance sheets.

For example, Just-In-Time (JIT) manufacturing practices emphasize the importance of keeping inventory levels to low figures or zero to ensure efficiency.

By using these practices and completing their backlog of WIP items, some companies regularly move all their WIP goods to the finished goods stage before accounting.

Manufacturing outfits with predictable assembly line times present WIP items as a percentage in their accounting.

They derive this percentage based on previous estimates of completion and product manufacturing times.

WIP inventory figures are useful information to measure metrics related to the production process.

This enables production managers to calibrate the output of their assembly line with market vagaries.

Thus, managers can tamp down or increase production based on the availability of materials in bins on the factory floor.

WIP can also be used to determine supply chain health.

Too many items classified as WIP and not as many items in the finished goods stage is a sign of inefficiency on the production floor.

It also translates to additional costs on the balance sheet because WIP items incur storage and warehousing expenses.

These expenses cannot be moved elsewhere or re-invested into other departments within the manufacturing setup. That is why companies aim for as low as possible WIP numbers.

WIP is often classified as a current asset on a company’s balance sheet because available WIP inventory in different stages of completion can be converted to finished goods that, subsequently, may generate a sale profit for the company.

This inventory stays on a company’s balance sheet or is written off based on the duration of time it spends on the production floor.

WIP represents an intermediate stage in the production process.

It comes before the finished goods stage and after the raw materials are moved to the production floor from stores.

Once the product has moved past WIP, it is classified as a finished goods inventory.

After the product is sold, WIP cost is one among several costs that are rolled up to determine the final cost of goods sold in the balance sheet.

Consider the case of television manufacturer ABC.

Its raw materials consist of an assortment of electronic circuits, cathode ray tubes, displays, and packaging materials.

ABC already has $100,000 worth of raw material inventory left over from the previous year and makes additional purchases of $300,000 to manufacture new television sets for this year.

At the end of the year, it is left with unfinished inventory (or inventory that was left over from its planning stage) worth $150,000. We use these three figures to calculate ABC’s raw material inventory.

WIP Inventory = Raw Material Inventory (at the start of the year) + Purchases made during the year – Unfinished Inventory

WIP Inventory for ABC = $100,000 + $300,000 – $150,000 = $250,000

ABC has five workers on its assembly line and they are each paid an annual salary of $40,000. Therefore, direct labor costs for ABC are $200,000.

Besides these costs, ABC also incurs manufacturing overheads in the form of worker benefits, insurance costs, and equipment depreciation costs.

A full breakdown of ABC’s overhead costs is shown below:

Total WIP Costs are calculated as a sum of WIP Inventory + Direct Labor Costs + Overhead costs.

Thus, WIP costs for ABC = $250,000 + $200,000 + $132,000 = $582,000

Work-In-Progress is often used interchangeably with Work-In-Process.

Conceptually, both terms are similar in that they refer to the costs associated with a partially-finished good or service moving across the production floor. But they can mean different things in specific instances.

In general, Work-In-Process inventory refers to partially completed goods that move from raw materials to a finished product within a short time frame.

For example, consulting and manufacturing projects often have custom requirements based on the client.

The manufactured good moves through the production process in a relatively short amount of time before it is presented to the client or customer. Inventory is referred to as Work-In-Process inventory in such cases.

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Answer # 2 #

To calculate the WIP precisely, you would have to count each inventory item and determine the valuation accordingly manually. Fortunately, you can use the work-in-process formula to determine an accurate estimate. It is: Beginning WIP Inventory + Manufacturing Costs – COGM = Ending WIP Inventory.

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D.A. Moosa
Financial Analyst
Answer # 3 #

Supply chain and managing all types of inventory are established fields of expertise now. And one thing that these professions agree on is that it’s usually best to minimize work in process inventory.

The more WIP inventory you have:

Figuring out WIP inventory is an involved process because it involves associating a cost with a percentage of completion. That’s not easy to do. And that’s why it’s standard practice to minimize WIP inventory before reporting. There’s less risk to assume and less uncertainty to wrestle with on the balance sheet.

The more you learn about WIP inventory, the easier it will be to body slam it into submission. Let’s get ready to rumble.

Work in process inventory is generally described as a company’s unfinished goods waiting to be completed and sold. The standard work in process inventory definition is all the raw material, overhead costs, and labor associated with every stage of the production process.

Any raw material inventory that has been combined with human labor but is not yet finished goods inventory is work in process inventory. That makes it a part of manufacturing inventory (see what is inventory). Think everything after raw material inventory and before finished product inventory. It’s all the production costs incurred for all partially-completed goods. Another title for work in process inventory is work in progress inventory (both abbreviated WIP inventory).

The above work in process inventory definition explains the what, but not the why. Why do companies have partially completed inventory? A few reasons.

The most obvious is that the items are in the process of being produced. They may be on a conveyor belt in the act of fabrication or they may be waiting in a queue for further processing. Either way, they are actively being created.

Another reason for work in process inventory is safety stock, buffer stock, or anticipation inventory. Some companies find it beneficial to hold on to goods at certain stages of production as insurance against shortages of supply or spikes in demand. Vendor managed inventory agreements are often helpful in determining the right purchase orders to protect against supply chain surprises.

Work in process inventory and work in progress inventory are interchangeable phrases, for the most part. Though some within supply chain management do make a small distinction between them. Some folks refer to work in process inventory only in the context of production operations that move along relatively quickly. They reserve work in progress for larger-scale projects like consulting or construction work.

Let’s see if you’ve fundamentally understood what work in process inventory is. Here’s a quiz.

Work in process inventory increases when:

If you chose C, you’re correct. Nice work!

For the majority of manufacturers, WIP inventory is the raw materials plus labor and production overhead. For more complex operations—like big constructions projects—it can include wages, subcontractor costs, and more. Regardless, it takes time to figure out. Again, that’s why most manufacturers minimize WIP before they tally it up at the end of the accounting period.

Beginning work in process inventory is actually the same thing as ending work in process inventory, just for a different accounting period.

Businesses always calculate WIP inventory at the end of accounting periods, whether that be a quarter, year, or some other time period. This total WIP figure is the ending work in process inventory for that accounting period—and the beginning work in process inventory for the next accounting period.

This ending WIP inventory is listed as a current asset on your company’s current balance sheet. So, to figure out how to find work in process inventory you need the beginning work in process inventory. And to calculate that, you need the ending work in process inventory.

The work in process formula is:

Let’s use a best coffee roaster as an example.

Imagine BlueCart Coffee Co. has a beginning work in process inventory for the quarter of $10,000. This refers to all the bags, labels, beans yet-to-be-ground, and other raw materials waiting to be turned into finished bags of coffee ready for sale.

Over the next three months, the company incurs production costs of $75,000 roasting, grinding, and packaging coffee beans. The total value of the finished goods over the quarter is $72,000.

This means BlueCart Coffee Co. has $13,000 worth of inventory that’s neither raw material nor finished goods. For a perishable item like coffee, growing WIP inventory figures are a red flag unless they’re strategically kept as anticipation inventory.

Keep in mind that this work in process formula is an estimate. There are things it doesn’t consider, like waste, spoilage, downtime, scrap, and MRO inventory. To get a totally accurate WIP inventory is unreasonable. It would require combing through the production process and itemizing every little inevitability. In general, companies calculate estimated WIP inventory levels. It’s better than nothing.

Keeping tabs on your work in process inventory requires some bookkeeping. If you’re not an accountant, you may wonder how a work in process inventory journal entry looks. Here’s a simple example that shows how records shift from debits to credits throughout the production cycle.

In this example, your initial purchase of $5,000 of raw material which is debited to your raw materials inventory. You’d then credit your accounts payable for the same amount.

Once the raw materials enter the production cycle, that $5,000 debit is moved to the WIP inventory account and the raw materials account is credited with $5,000.

And, finally, once the WIP inventory becomes finished goods, the $5,000 is debited to the finished good account and $5,000 is credited back to the WIP inventory account.

Understanding WIP inventory is crucial for monitoring and improving production capacity and inventory control. Unless you’re holding on to a substantial amount of WIP inventory is a part of a strategic anticipatory inventory management strategy. Otherwise, it’s not ideal to let it grow.

That’s because a business’s sustained WIP inventory plays a big part in the valuation of their business. And approval of any loans they apply for. WIP isn’t immediately sales-ready and, while it counts as a current asset, isn’t very liquid. Loan companies are hesitant to consider WIP inventory as collateral. If you can't calculate your WIP, you won't deserve that warehouse manager salary.

“Large” and “small” aren’t good gauges of healthy WIP inventory. Consistency relative to sales is a better benchmark. If your WIP inventory remains consistent or contracts without resulting sales loss, it’s a sign that your production operations are smooth. But If it continually grows without an associated growth in sales, it’s a sign of inefficiency. You can then focus on optimizing your shipping to make even more money. Route optimization software is great for that, especially a multi-stop route planner.

You should also look into using a wholesale marketplace to find suppliers who can fill orders more quickly or even list your own products for sale.

Work in process inventory can be difficult to understand outside of proper context. If you’re optimizing your warehousing practices or learning more about inventory, you probably have several questions. Check out these commonly asked work in process questions below:

The work in process inventory formula is the Beginning WIP Inventory + Manufacturing Costs – COGM. This calculation will give you the end work in process inventory.

Another title for work in process inventory is WIP Inventory.

Your beginning work in process (WIP) inventory is your previous accounting period’s ending WIP inventory. You can carry it over from the previous month and use it as the current month’s starting WIP inventory.

If you still need to find your beginning WIP inventory, you can do so with a formula. The calculation is your cost of goods sold (COGS), plus your ending inventory balance, minus your cost of purchases. If you don’t have an ending inventory balance to include, simply subtract your cost of purchases.

As an example, let’s say your current COGS is $5,000, your ending inventory balance is $9,642.40, and your cost of purchases is $8.924.10. With the formula above, this would give you a beginning work in process inventory of $5,718.30.

Yes, work in process (WIP) inventory is considered inventory. Any part, product, or item that’s used to make merchandise inventory is listed on a company’s balance sheet. WIP inventory is considered an inventory asset, and as it moves through the stages of production, it becomes part of the cost of sales.

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Moinak btibt
FIELD SERVICE TECHNICIAN
Answer # 4 #

WIP stands for “work in progress” and refers to any partially complete inventory not yet ready to be sold to customers.

At the WIP stage, these inventory items are not marketable and require more time before it can be sold on the market.

The term work in progress (WIP) describes inventory that is partially finished and currently amid the production cycle.

For instance, the WIP inventory could be undergoing finishing touches prior to being marked as complete.

There are three stages that inventory – a current asset on the balance sheet – can be classified into:

Once the product is marked as a finished good and is subsequently sold, the appropriate amount is removed inventory balance on the balance sheet.

On the income statement, the sale of the product would be recorded in the cost of goods sold (COGS) line item.

The formula for calculating work in progress inventory – in the specific context of a manufacturer – is as follows.

The beginning work in progress inventory is the ending balance from the prior accounting period, i.e. the closing carrying balance is carried forward as the beginning balance for the next period.

The manufacturing costs are then added to the beginning balance.

Manufacturing costs are a bit of an open-ended term but refer to any costs incurred related to the process of manufacturing raw materials into a finished product, e.g. the cost of raw materials, labor, and overhead costs.

In the final step, the cost of manufactured goods (COGM) is subtracted.

COGM is defined as the total costs incurred while creating a finished product, and in order to estimate the value of a company’s end-of-period WIP, the finished COGM is a necessary input.

COGM can be determined by adding the total manufacturing costs to the beginning WIP inventory, followed by subtracting the ending WIP inventory.

Work in progress inventory can be found in the current assets section of the balance sheet, which reflects how inventory is expected to cycle out within a twelve-month period, i.e. be converted from raw materials into cash.

Generally, most companies strive to reduce the amount of time that inventory spends at the work in progress (WIP) stage.

However, different industries will have different targets for their inventory management KPIs, particularly for more technical, manufacturing-intensive products that require substantially more time to pass through the WIP stage.

Therefore, it is also essential to make internal comparisons (i.e. track the changes in WIP year-over-year), as well as avoid making comparisons between companies operating in entirely different industries, i.e. stick to the company’s closest competitors and other industry peers to determine the proper target WIP benchmark.

We’ll now move to a modeling exercise, which you can access by filling out the form below.

Suppose a manufacturer is attempting to calculate its work in progress (WIP) for the end of the latest fiscal year, 2021.

Q. If the beginning WIP balance is $20 million, the manufacturing costs were $250 million, and the cost of goods manufactured (COGM) is $245 million, what is the ending work in progress (WIP) balance?

The assumptions that our model will use are as follows.

The ending work in progress inventory roll-forward starts with the beginning balance, adds the manufacturing costs, and then deducts the cost of goods manufactured (COGM).

If we enter those inputs into our WIP formula, we arrive at $25 million as the ending work in progress (WIP), reflecting an increase of $5 million in WIP from the beginning to the end of the period.

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