Work In Process Inventory refers to materials that have been partially completed through the production process. So the flow is like this, to make a product or finished product, of course, producers need raw materials. After the raw materials arrive at the producer’s hands, the production process begins to make the finished product or goods. Inventories that are in the process of being converted into finished products that are ready to be sold are called Work in Process Inventory.
A simple example, a furniture company that produces a dining table whose raw material is teak wood. When the table is perfectly formed, of course it requires finishing or finishing in the form of coating and staining on the wood to get an elegant appearance. This table that has not been finished is called an inventory of goods that are in the production process.
For manufacturing companies, of course, it becomes very important to know for sure the amount of inventory they have, both in the form of raw goods, and in the form of goods that are in the process of being produced. In this case, inventory management plays a vital role to help count, take an inventory, and perform maintenance on all inventories. By calculating inventory regularly, of course, it will make inventory data accurate and up to date which can be important data for producers about the number of products that need to be made, including making predictions on how many units of goods will be produced according to the level of demand.
In addition to inventory management, financial accounting management also plays an important role in calculating the costs that must be incurred in the process. In the balance sheet, inventories that are still in production will be included in the asset category, and in order to calculate and obtain the necessary details, it must refer to the balance sheet of the previous quarter, either in the period of months or years.
Working in process inventory is materials that have been partially completed through the production process. These items are usually in the production area, although they can also be stored to one side in the buffer storage area. Working in process inventory generally includes all raw material costs associated with the final product, as these raw materials are often added early in the conversion process. In addition, a portion of labor costs and overhead costs will also be allocated to work in progress, thus more of these costs will be added as part of the remaining production process.
Formula for Working In Process Inventory
Working In Process Inventory = Raw Material Cost + Labor Cost + Overhead Cost
Description of the formula above:
– Raw Materials: These include materials that will be directly used in the production process.
– Labor Costs: These costs include wages and salaries to be paid to workers and staff who have been directly involved in the production process.
– Overhead: In the formula, this includes the cost of indirect materials, indirect labor and other overhead costs directly related to the production process.
Advantages of Working In Process Inventory
Working in process inventory is being processed into finished goods, this can help in early conversion to finished goods and increase cycles in turnover.
Working in process inventory helps in the continuous production of goods, when inventory is not taken into account it will cause some time in production because all inventories can be in a state of raw materials or finished goods.
Working in process inventory can help meet product demand because it contributes to a better production cycle.
Because production is a continuous process, there will be no idle raw materials and assist in production planning in accordance with the lead time for procurement of raw materials from suppliers.
Working in process inventory is an asset to the business, not valuing materials will result in undervalued inventory and cost of goods manufactured will be overstated to that extent, and impact profits.
Tracking working in process inventory helps in understanding the production process, as higher material indicates some bottlenecks in the production process, and no smooth process flow. This helps in identifying and resolving the problem.
Disadvantages of Working In Process Inventory
Assessment of working in process inventory is quite complicated because we need to understand the progress and process of the inventory.
Goods need to be produced in accordance with existing demand, as a result of this continuous production can lead to accumulation of inventory which in turn locks working capital, and increases storage costs.
Inventory tracking and insuring the same comes with some additional costs for the business.
The risk of inventory becoming obsolete results in losses if the goods produced exceed the demand in the market.
The term work in process inventory or commonly referred to as WIP inventory is a term that can be used in supply chain management or supply chain management in a production company. We know that the activities of a company that produces goods and services must go through several stages such as the stages of the process of preparing raw materials, production processes, and finished products. Well, this work in process is a production process that is in the second stage, namely the production process itself. First, I will discuss a little about supply chain management. Supply chain management is nothing but the process of converting raw materials into semi-finished products which in turn become finished goods that are ready to be distributed to consumers.
In the supply chain management, there are several important stages to go through, the first is the process of preparing raw materials for the production process. Before carrying out the production process, there should be a plan about how much production will be carried out so that the preparation of raw materials becomes more effective. Furthermore, the second stage is related to the production process where this production process converts raw materials into finished materials where if there are further stages at this stage it produces semi-finished goods or finished goods. After the goods are finished, the goods will be stored in the warehouse to be evaluated or re-checked by quality control before being distributed to the public.
In fact, in the production process, especially those that involve many separate parts, the production process is more complex because it deals with parts that involve many components. These components relate to semi-finished goods. Well, this work-in inventory process is a process of collecting data on semi-finished goods that function as a component to complete the ongoing production process. Let me give an example of the production process of a car. We know that the production of a car is very complex because it is made of various components.
In car production, there are components of semi-finished goods that are needed such as car body parts, engines, or other semi-finished goods. The WIP inventory process is actually used for the production of goods that have many components. In the production of a car it takes many components as a constituent. Therefore, before the preparation or assembly process in the previous car assembly, it is necessary to first calculate the supply of these semi-finished goods. Well, one of the functions of this WIP inventory is to prepare the required components for semi-finished goods.
In addition to the function as a recording process, there are many other functions of the WIP inventory, such as in the research and development process of a production company where in carrying out the new product development process it is necessary to record the required data. on the required production costs will be known. In addition, WIP inventory also functions as a monitoring or evaluation of the semi-finished goods used. If there are goods that are lacking or there are more semi-finished goods, then this should be questioned because it could be that the more semi-finished goods are the result of an imperfect production process or a component of the semi-finished goods is not installed. The next function of WIP inventory is as a financial recording process which will later be used as material for preparing company financial statements.
