Determining per unit cost may be taken as a very common aspect in the manufacturing industry, but it is no surprise that it has to be handled professionally. No matter what one may argue, calculating work in process requires utmost brilliance and perfection in technical accounting knowledge. Obviously, determining raw material, labor and overhead costs incurred in manufacturing a certain good is no easy feat. You have to carefully examine and evaluate the costs of each and every aspect of producing a finished good at various stages of the production process before you can determine 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 an 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 products that are partially completed”. A careful analysis has to be made at various stages of the production process in order to determine all the costs incurred on raw material, labor, and overhead costs. For determining the exact unit cost, you must have a clear picture of all the costs incurred from the raw material to the finished good. It is important that your bookkeeping shows all of the costs in order 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 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 easier than before through superior automation and technology. Now, we have access to advanced accounting software and solutions which have made calculation easier, quicker, and more accurate. This indicates that calculating work in process is now considered a piece of cake for most individuals who have command and control on these 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 in order 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 is 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. For determining how many units should be produced, raw material costs, labor costs, and overhead costs, you must have a clear picture in mind about 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 time periods. For attaining 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 process must be handled with the utmost care because it directly influences your profitability index.
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