Achieving the right strategic balance in inventory at the beginning of a new business is not easy. Manufacturing businesses aim to minimize their work in process to maximize their profitability. Simultaneously, they also look for alternative routes to reduce their production and post-production costs as much as possible to increase their yearly profits. Finding the right WIP costs for small businesses, such as a bakery, is challenging since you cannot anticipate exact labor and overhead costs where ingredients are easily transformed from raw material to a finished product. You can easily calculate WIP through accounting/bookkeeping knowledge and wisdom for big setups.
Is There A Difference Between Work In Process And Work In Progress?
Work in Process
These terms are often used interchangeably because WIP is perceived as the same thing. However, there is a slight difference between these two terms that primarily lies in the context. Work in process refers to the production costs of partially completed goods, which means the manufacturer’s inventory is not yet completed. It includes different costs like raw material, labor, and overheads which need to be known for determining the per-unit cost of goods manufactured.
This indicates that work in process speaks more of the inventory side of things, whereas work in progress involves the construction of long-term costs as well. To lower work in process costs, manufacturers need to play smart and make their raw material purchases from the most affordable vendors. Also, they need to hire labor for the production shifts at competitive rates and minimize overhead costs as much as possible. The final per-unit price can only be determined if manufacturers know the exact level of output from the resources applied. In short, whatever is consumed on the factory floor to produce goods, such as the direct cost of raw material, direct costs of labor, and factory overheads for the production period. This will give an exact per unit cost. The formula for calculating Work in Process is:
Work in process = (operating inventory goods in process + raw material used + direct labor during the period + factory overhead for period) – ending inventory
Work In Progress
Work in progress involves the construction of long-term assets that will be used to produce goods that are not yet completed. Until the time construction work is completed and the facility starts to manufacture goods itself, the amount spent on partially completed construction of long-term assets would fall under work in progress. In the balance sheet, the amount spent will be treated in long-term assets under the plant and equipment section. When construction wraps up, it will no longer be treated as a work in progress. Depreciation of long-term assets starts as soon as the whole building and infrastructure is operational and starts to produce goods.
Cost Saving Benefits
The key cost-saving benefits of work in process and work in progress are efficiency, accuracy, traceability, and productivity. Every production house strives to minimize the work in the process due to a lack of production or manufacturing knowledge and awareness.
Businesses cannot survive for long if the per-unit price of goods is only based on vague assumptions and mere guesses. Knowing the actual price of the manufactured product is essential for setting the correct price of the product with markup. For example, if you can determine the exact per-unit price of the product to be $5 and if you expect to sell the product directly to the retailers for $7, which means a markup of $2, you will know exactly how much profit you are earning by selling each unit.
Work In Progress—Done Right!
You may be proficient at manufacturing goods in your production facility but not at costing. For ideal costing, you need to hire an in-house accounting expert to determine and reveal the exact per unit cost of production. Based on manufacturing and bookkeeping records, the expert will help you put the right production order in place for optimal results.
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