Work in Process Inventory: Formula & Definition | Flowspace

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Metrics to Know Before Calculating WIP Inventory

Calculating Work in Process (WIP) inventory can be a complex process, but having a clear understanding of the key metrics involved simplifies it significantly.

Beginning Work In Process Inventory

The beginning WIP inventory is a snapshot of the unfinished goods at the start of an accounting period. This figure is essential as it serves as the baseline from which all additions and subtractions of WIP are measured during the period. To determine the WIP inventory value at the beginning, you need to consider all the materials, labor, and overhead costs that have been invested in the goods that have not yet completed the manufacturing process.

Manufacturing Costs

Manufacturing costs encompass all expenses related to the production of goods. These include materials, direct labor, and manufacturing overhead. Total manufacturing cost is a critical metric for calculating the WIP inventory cost, as it directly affects the valuation of inventory still in production at any given time. Understanding manufacturing costs helps managers make informed decisions about pricing, budgeting, and manufacturing efficiency.

Cost of Goods Manufactured (COGM)

The Cost of Goods Manufactured is the total manufacturing cost of goods that have been completed during the accounting period. This metric is pivotal for understanding the efficiency of the manufacturing process and for evaluating how well resources are being utilized. COGM includes all costs from the beginning WIP inventory levels up to the final finished goods.

What Is Work in Process Inventory?

Work in process inventory is a metric that measures how much inventory—in sales—is currently in the manufacturing process, or unfinished. However, work in process inventory is different from raw material. Work in process does not measure any finished product, only products that have begun production.

Work in Process Inventory vs Work in Progress Inventory

While these two KPIs are often used interchangeably, certain industries use them in different ways. Work in process refers to raw materials that are processed into finished goods inventory, while work in progress often refers to the progress of a project in the construction and service industries. The production cost for these goods factor in the labor cost, overhead cost, and material cost to create the total cost.

Why Does Work in Process Inventory Matter?

Although the work in process inventory isn’t sitting on a shelf waiting to be sold, the products in process are counted on a business’ balance sheet for the given accounting period. This is why it’s important for brands to understand how much in process inventory they have at any given time, so they have the most accurate cash flow. It is also important to keep tabs on these numbers when calculating the inventory to sales ratio, which is just one of many inventory KPIs.

How to Calculate Work in Process Inventory

In order to calculate work in process, a brand first needs to determine its beginning work inventory for the next time period. A brand also needs to determine its manufacturing costs and the cost of manufactured goods (COGM). Once the company has those metrics, it can calculate the work in process inventory with the formula below.

Work in Process Inventory Formula

The work in process inventory formula is: WIP Inventory = Beginning WIP Inventory + Manufacturing Costs - COGM

Let’s look at an example in the fashion industry. A brand has a beginning work in process of $100,000. That same brand spends $200,000 on manufacturing costs and produces $225,000 worth of finished goods. Let’s input those numbers into the work in process formula to determine the work in process inventory: WIP Inventory = $100,000 + $200,000 - $225,000

That means this brand has $75,000 of work in process inventory.

How to Optimize Work in Process Inventory

Many ecommerce brands rely on manufacturers for raw materials or finished parts to create finished products. That means that optimizing the supply chain and the work in process inventory KPI involves working closely with manufacturing partners. Ensuring an efficient inventory management process is critical to optimizing the work in process inventory.

Optimize WIP Inventory with Flowspace

Flowspace pairs powerful software with a flexible nationwide order fulfillment network to support growing ecommerce brands as they optimize their supply chains and improve work in process inventory levels. Flowspace improves product inventory management by providing complete inventory visibility of inbound logistics, outbound logistics, and in-progress stock. Brands can ensure an optimal stock level with real-time inventory tracking, low inventory level alerts, and a predictive view of the remaining product.