What is the Work-In-Process Inventory Formula?
Work-in-process (WIP) inventory refers to partially finished materials inside any production loop. It refers to the entire cost of incomplete goods currently in production. As a result, the work-in-process inventory is included in the manufacturing inventory.
The work-in-process formula determines the stock of raw material that has undergone some level of labor/processing but is yet to be categorized as a finished good.
Significance of Work-in-Process Inventory Formula in an E-commerce Business
The ending work-in-process inventory formula is essential to the company’s balance sheet. To keep account for various important reasons, like –
- Boosting the production line with data-backed information
- Determining Buffer stock, safety stock, or anticipation inventory which are additional justifications for work-in-process inventory. Some businesses hold onto products during specific production phases to avoid shortages of supplies or sudden increases in demand
Applications of the Work-in-process Inventory Formula
Companies can use the WIP formula to calculate the return on investment on capital investments easily. The essential applications of the work-in-progress formula include –
- With the WIP formula, companies can identify bottlenecks in the production chain to rule out excess inventories or shortages.
- The work-in-progress formula provides a comprehensive idea of overall investment for the business
- It also helps in determining the need for replenishment
Work-in-Process Inventory Formula
Definition of Each Element Used in the Work-in-Process Inventory Formula
- Beginning WIP Inventory – The beginning WIP inventory is the last accounting period’s ending WIP inventory.
- Manufacturing Costs – Total cost of manufacturing products.
- Cost of Finished Goods – Total cost of finished produced products.
How To Use the Work-in-Process Inventory Formula To Calculate a Business’ Turnover Ratio?
Assume the beginning WIP for a company ABC is ₱300 million, manufacturing costs ₱300 million, and total costs of finished products are ₱250 million.
Thus, using the ending work in process inventory formula, the ending WIP is calculated as –
Ending WIP = ₱300 million + ₱300 million – ₱250 million
Ending WIP = ₱350 million
The ending WIP for company ABC is ₱350 million for the given year.
What Can You Infer From the Result of the Work-In-Process Inventory Formula?
The WIP formula enables an e-commerce business to optimize its supply chain and maintain revenue growth.