A manufacturing company converts raw materials and purchased components into an inventory of finished goods. Work in process is an intermediate step in which inputs -- direct materials, labor and overheard -- have been partially converted to finished goods. The ending balance in the WIP account is the value of partially completed inventory as of the end date of the reporting period. Businesses that maintain a perpetual inventory always know the current value of WIP, but businesses that employ the periodic inventory method -- by taking physical counts of finished goods -- can use a formula to determine period-ending WIP.
Identify the beginning WIP value. The beginning WIP for the current period is the ending WIP of the previous period.
Compute the direct materials used for the period, which is equal to the beginning inventory plus material purchases minus ending inventory.
Calculate the total manufacturing costs for the period. This is the sum of the period's direct labor, factory overhead and direct materials used.
Derive the cost of goods manufactured for the period, which equals the cost of goods sold plus ending inventory minus beginning inventory.
Subtract the cost of goods manufactured for the period from the manufacturing costs. The result is the WIP for the period.
Add the WIP for the period to the starting WIP, giving the ending WIP balance.
As an example, suppose a company has a starting WIP balance of $10,000, manufacturing costs of $39,000 and a cost of goods manufactured of $40,000. The ending WIP is therefore $10,000 + $39,000 - $40,000, or $9,000. Companies usually disclose WIP in a footnote to the balance sheet, but have the option of reporting it directly on the balance sheet.
The calculated value of WIP usually overstates its actual value because of the costs arising from spoilage, scrap and rework. Businesses can derive WIP values that are more precise by subtracting these costs and other pertinent ones from the calculated value. The value can also be verified by taking a physical count of WIP at the end of the period.
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