Imagine your company needs help tracking products through the production line. Raw materials are accounted for with a spreadsheet, and finished goods are visible and ready to ship — but what about everything in between?
To monitor your production process closely, effective work-in-process (WIP) inventory management is key. WIP inventory monitors the value of products at each manufacturing stage, giving you insight into both progress and expenses, which you can use to optimize operations, prevent bottlenecks, and reduce costs.
Keep reading to learn more about WIP inventory, how to calculate it, and best practices for WIP inventory management. Or, if you already use WIP, scroll to the bottom to learn how Fishbowl can streamline your WIP processes and improve efficiency.
Understanding work-in-process inventory
WIP inventory captures the value of products that are currently being manufactured. These items have moved beyond the raw material stage and are being transformed into finished goods, but aren’t yet ready for sale. WIP inventory includes materials and labor costs used in the production process.
Monitoring WIP inventory helps you understand your production efficiency. If you have too many items in production, it could indicate bottlenecks or inefficiencies. But if you have too few items in production, you might be facing a slowdown that could lead to costly order fulfillment delays. Managing WIP inventory effectively enables you to address these problems as they arise.
Tracking your WIP inventory is also important because it’s one of four types of manufacturing inventory — alongside raw materials, finished goods, and maintenance, repair, and operations (MRO) supplies — and represents a portion of your reportable assets. Although you can’t sell WIP inventory as merchandise, it still has value — and knowing the value of your WIP inventory is crucial for financial reporting and cost management.
Work in process vs. work in progress: What’s the difference?
You might hear “work in process” and “work in progress” used interchangeably. Both terms refer to ongoing, unfinished projects.
That said, “work in process” is usually preferred in the manufacturing industry to describe goods that are still under production for a short time. In contrast, “work in progress” is more common in industries like construction, where a project might be in development for longer. You can use whichever term you like, but note that Fishbowl Advanced uses the term “work in progress” to generate reports about unfinished inventory.
How to calculate work-in-process inventory
If you’re wondering how to calculate WIP inventory, follow these steps.
1. Gather three key metrics
To calculate WIP inventory, you need to know your manufacturing costs, beginning and ending WIP inventory costs, and cost of goods manufactured (COGM).
- Manufacturing costs: This is how much it costs to manufacture finished goods. To calculate this, add up the costs of all raw materials, labor, and overhead needed for production.
- Beginning WIP inventory cost: Determine the value of WIP inventory at the start of the accounting period by carrying over the WIP inventory balance from the end of the previous period.
- COGM: This represents the total value of goods completed in that period (and moved out of WIP). To calculate COGM, add together your manufacturing costs and beginning WIP inventory cost. Then, subtract the ending WIP inventory cost.
2. Use the work-in-process inventory formula
Incorporate the three key metrics into this ending WIP inventory formula:
Ending WIP inventory = Beginning WIP inventory + Manufacturing costs – COGM
This formula provides the value of unfinished goods still in production at the end of the period. Here’s an example to help you understand how it works:
Say your company manufactures office supplies like printers and copiers. At the beginning of the period, your WIP inventory is valued at $8,000. You incur $40,000 in manufacturing costs over the period. At the end of the period, you calculate your COGM to be $45,000.
To find your ending WIP inventory, you add up the cost of your beginning WIP inventory ($8,000) and manufacturing costs ($40,000). This leaves you with a sum of $48,000. Then, you subtract your COGM ($45,000). The value of your ending WIP inventory would be $3,000.
Why work-in-process inventory management matters
Effective WIP inventory management is crucial for any manufacturing operation. Here are four ways it could benefit your company.
Enhanced production efficiency
By keeping track of items in various stages of production, you can quickly spot bottlenecks and potential delays, streamlining production. This insight allows you to adjust workflows to reduce lead times and better allocate resources. As a result, you minimize downtime, streamline operations, and achieve a more agile, efficient production process.
Better customer service
When you know each item’s status in the manufacturing process, it’s easier to predict when items will be completed and ready for shipment. As a result, you can keep up with market demands, provide more accurate delivery estimates to customers, and ensure timely order fulfillment. This not only strengthens relationships with existing customers, but it helps attract new ones by improving your reputation for reliability and efficiency.
Improved cost control
Accurate WIP tracking gives you better visibility into your production costs at each stage. It can also tell you about your manufacturing productivity — how quickly you produce finished goods.
With these insights, it’s easier to prevent overproduction and waste, identify cost-reduction opportunities, and optimize production processes. This allows you to manage expenses more effectively and reduce excess inventory that’s expensive to store.
More accurate financial reporting
WIP inventory can represent a significant portion of your assets. Maintaining up-to-date WIP inventory records helps ensure that your financial statements reflect the true value of your inventory. This is crucial for compliance with accounting standards like Generally Accepted Accounting Principles (GAAP).
Best practices for WIP inventory management
Now that you know how it can improve your manufacturing business, here are four tips for optimizing your WIP inventory management.
1. Implement real-time tracking
Real-time inventory tracking tools allow you to monitor how items move through the production process. With technologies like barcode scanners, RFID tags, and IoT sensors, you can gain instant visibility into the status and location of every product under production. This makes it easier to keep a close eye on your WIP inventory, helping you identify and address issues as they arise.
2. Standardize processes
Standardizing your production and inventory processes ensures consistency and reduces errors. Develop clear procedures for handling WIP inventory, from initial tracking to final reporting, to keep production moving efficiently. This includes setting guidelines for data entry, inventory checks, and quality control.
3. Analyze workflow regularly
Regular reviews of your production workflow allow you to spot trends in production delays and bottlenecks. They also create opportunities to optimize labor and material usage. For example, if you notice that certain tasks are consistently delayed due to understaffing, you can adjust your labor allocation to better meet production needs. Conversely, if some employees have too much downtime, you can make adjustments that improve their productivity.
Continuously evaluating your workflows ensures that you stay on top of inefficiencies, adapt to changing demands, and maintain a streamlined production process. Over time, this can help you achieve better performance and cost management.
4. Integrate inventory management systems
Inventory management software offers live insights into inventory levels, production stages, and order status. It can also help you trace the flow of materials and finished goods throughout your production process, making it easier to track your WIP inventory and understand how it fits into the larger picture of your supply chain.
Optimize your WIP inventory management with Fishbowl
Ready to take control of your WIP inventory and production efficiency? Let Fishbowl help.
Fishbowl’s inventory management software offers real-time tracking so you can monitor every stage of your production process with precision. And with Fishbowl’s comprehensive analytics, including the Work in Progress (WIP) report, you can gain deeper insights into your production flow. With a better view of your operations, Fishbowl can help you standardize processes and improve productivity.
Even better, Fishbowl seamlessly integrates with QuickBooks so you can track inventory costs with ease. Schedule a demo to learn more.