Most Important Steps for Calculating a Work in Progress

Determining per unit cost may be quite a common aspect in the manufacturing industry, but it is no surprise that it must be handled professionally. No matter what one may argue, calculating work in the process requires utmost brilliance and perfection in technical accounting knowledge. Determining raw material, labor, and overhead costs incurred in manufacturing a particular good is no easy feat. You must carefully examine and evaluate the costs of producing a finished good at various stages of the production process before determining the total cost incurred on producing a good or a commodity. The term WIP (Work In Process) is usually used in production and supply chain management which bears immense importance in the manufacturing and distribution industry.

What is Work in Process?

According to Investopedia, “it is the sum of all costs put into the production process to manufacture partially completed products.” A careful analysis must be made at various stages of the production process to determine all the costs incurred on raw material, labor, and overhead costs. To determine the exact unit cost, you must clearly see all the costs incurred from the raw material to the finished good. It is essential that your bookkeeping shows all the costs to come up with your final cost.

As far as the calculations are concerned, the formula for calculating work in process is:

Work in process = (operating inventory goods in process + raw material used during the period + direct labor during the period + factory overhead for the period) – ending inventory

WIP–in light of Automation and Technology

Fortunately, we have opened our eyes in such an era of modern accounting and bookkeeping, where processes have become more accessible through superior automation and technology. Now, we have access to advanced accounting software and solutions that have made calculations easier, quicker, and more accurate.

This indicates that calculating work in process is now considered a piece of cake for most individuals with command and control over this contemporary accounting and manufacturing software. Plus, we now also have access to accounting and bookkeeping professionals who make the process easier and help reduce manufacturing costs at various stages of the production process.

Benefits of reducing manufacturing Work in Process

There are numerous benefits associated with reducing manufacturing work in process costs. The top benefits include better cash flows, higher liquidity, and diminished business risks. However, a brilliant execution strategy is required to make things go in your favor. Since the ultimate aim of every manufacturing establishment is to reduce raw material, labor, and overhead costs in each unit produced, you must integrate innovative procedures and techniques to eradicate manufacturing bottlenecks. Moreover, calculating work in process may seem hard at first, but once you commence to sort things out piece by piece (costs), everything becomes relatively easier to handle.

Strategic forecasting and planning and the need for Calculating Work in Process

Undoubtedly, strategic forecasting and planning are critical to business success. The more you get yourself involved in reducing per-unit costs, the more you will save at the end of the day. To determine how many units should be produced, raw material costs, labor costs, and overhead costs, you must clearly understand your production requirements and specifications. Strategic variety usually involves realistic vision, mission, and out-of-the-box thinking for making future projections related to manufacturing and production.

Moreover, strategic planning and analyses will define where your company is heading and what the company aims to achieve in both short and long-term periods. To attain ideal results, machines can be added or integrated into the manufacturing process, and the workforce can be educated with newer and advanced techniques for optimal utilization of resources. Calculating work in the process must be handled with the utmost care because it directly influences your profitability index.