One of your business's many processes is turning raw materials into finished products ready for use. Sometimes, this transition is not completed by the end of your company's accounting cycle. The products that have not been finished are labeled as work in process. Accountants must use specific procedures to place values on these products for your company's financial statements.
Each accounting cycle starts with an amount for the beginning work in process. The beginning work in process for the current cycle is the same as the ending work in process for the previous cycle. For example, if your company uses a monthly accounting cycle for its financial statements and has $50,000 in ending work in process at the end of May, that same $50,000 would be used as the beginning work in process for June.
The process of converting raw materials into finished products costs your company in time and money. Manufacturing costs can include machine time, supplemental materials and hourly labor. For example, if your company spent $60,000 to operate its machine tools, $40,000 in manufacturing materials, and $100,000 in labor for the month, its manufacturing costs would be $200,000.
While the manufacturing costs include the expenses involved in producing all the goods a company creates throughout the month, the cost of goods completed includes only those goods that have completed the entire process. Since these products are ready for sale, they do not count as work in process. In the prior example, the machine time for the goods completed was calculated at $50,000, the material costs were $30,000 and the labor costs were $90,000, for a total cost of goods completed of $170,000.
The formula for ending work in process is relatively simple:
WIPe = WIPb + Cm - Cc
In this equation, WIPe = ending work in process; WIPb = beginning work in process; Cm = cost of manufacturing; and Cc = cost of goods completed.
In this example, the beginning work in process total for June is $50,000, the manufacturing costs are $200,000 and the cost of goods completed is $170,000.
WIPe = 50,000 + 200,000 - 170,000 = 80,000.
The ending WIP for June is $80,000. This total will also be the beginning WIP for July.
The ending work in process formula allows you to measure the effectiveness of your company's manufacturing process. Some processes may not allow for a zero value for ending WIP, but values that are too high can signify slowdowns in the process. Since works in process cannot be sold, they also represent lost revenue opportunities.