Work in process (WIP) is inventory that has been partially converted to finished goods through the production process, but which requires additional work before it can be recorded as finished goods inventory.
The calculation of ending work in process is:
Beginning WIP + Manufacturing costs - Cost of goods manufactured
= Ending work in process
For example, ABC International has beginning WIP of $5,000, incurs manufacturing costs of $29,000 during the month, and records $30,000 for the cost of goods manufactured during the month. Its ending work in process is:
$5,000 Beginning WIP + $29,000 Manufacturing costs - $30,000 cost of goods manufactured
= $4,000 Ending WIP
This formula only yields an approximate ending work in process number, since such factors as rework, scrap, spoilage, and incorrect record keeping can cause a considerable divergence between the results of the formula and the cost of the actual WIP on hand. In most cases, these additional issues will reduce the amount of ending work in process by charging additional items to expense in the current period.
Consequently, some companies use two alternative practices to arrive at an ending work-in-process, which are:
- Record no WIP. The manufacturing process may be so rapid or streamlined that a company can complete all production by the end of the measurement period, resulting in no WIP. Alternatively, the amount of WIP may be so insignificant (as is the case in some just-in-time environments) that there is no need to measure it.
- Conduct a count. Rather than using a formula, conduct a count of the work in process and assign standard costs based on the stage of completion. This approach is quite labor-intensive, and so is not recommended.