Work-In-Process Inventory Formula

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

Ending WIP Inventory = 

Beginning WIP Inventory + Manufacturing Costs – Cost of Finished Goods

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 Work in Progress =

Beginning WIP + Manufacturing Costs – Cost of Goods Manufactured

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.

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