People in production and supply-chain management use the term “work-in-progress” (WIP). It refers to the cost of products that are being made but not finished. WIP inventory can include both materials and labor and specifically the costs of these products. These products are in various stages of production. Typically, WIP is also placed in the inventory section on the balance sheet. Later, these costs move to finished products and then to sales costs.
Work In Progress Inventory Formula
Most merchants calculate their ending WIP inventory costs at the end of a reporting period. To calculate it you need the beginning WIP inventory, production costs, and the value of your finished goods.
The Role of Work in Progress Inventory in the Supply Chain
Even though you can’t look at WIP inventory, it’s an asset on the balance sheet. That’s why it’s better to keep as little as you can.
Actually, having too much of it might show that there are problems in the supply chain. Also, having too much of it can make costs go up and productivity go down in these ways:
- You need a place to keep WIP inventory. Keeping inventory that isn’t sold for a long time makes costs go up and profits go down. Make space for finished goods that can make money.
- WIP inventory is money in materials and labor. Having less means your money is in finished goods you can sell.
- Unfinished products are at more risk of getting lost or damaged.
Work-in-Progress vs. Work-in-Process
Work-in-process means things that are partly done. These are also called goods-in-process. Sometimes, it’s for things that become finished products fast, like manufactured items.
As said before, work-in-progress can mean things that need lots of time, like projects. But usually, both terms can mean unfinished products. A manufacturing company’s balance sheet lists this kind of inventory. It also includes labor, materials, and manufacturing costs.
Works-in-Progress vs. Finished Goods
WIP and finished goods indicate the degree of completion and readiness for sale. WIP is in the middle, progressing from raw materials to the final product. Finished goods are fully prepared for sale.
These terms refer to how a company manages its inventory, rather than describing concrete items. What’s considered finished for one company might differ for another. For instance, plywood might be ready to use for a lumber mill, but not for a cabinet maker.
So, the difference between WIP and finished goods depends on where they are in the inventory process. WIP is in the middle and finished goods are at the end.
How To Optimize Your WIP Inventory Flow
1. Source The Right Supplier
If your product isn’t very customizable, you might not see much about WIP inventory. You can decide where to get products and which manufacturer to use. The manufacturer should manage WIP and cut costs while making production better. Furthermore, to make sure your supplier is the right fit you can ask them questions regarding the source and cost of the materials, etc.
2. Use Megaventory To Help With Inventory Management
For online stores, inventory is a big asset. When your WIP becomes products you can sell, you need to track it as it’s sold. With Megaventory you can watch inventory in real time and manage your inventory better.