Inventory Management 5 min read
Work in Process (WIP) Inventory – Concept and Formula Explained
January 26, 2021 by Srishti Arora - 5 min read
eCommerce inventory management is a complicated task. More often than not, if your inventory is not synced with your incoming orders, it can lead to huge blunders and spoil the customer experience due to delayed deliveries and incorrect orders.
Therefore, it is essential to understand each type of inventory and its significance in your e-commerce business. If you are a manufacturer, who makes their products and runs a D2C brand, it is essential to understand WIP or Work in Process inventory. This will help you know the production supply chain and how you can manage inventory better.
What is WIP Inventory?
WIP or work in process inventory refers to the total cost of unfinished goods currently still in production. It is a common term used in the production and supply chain management of e-commerce businesses that manufacture their products.
If you have a WIP inventory, it is usually considered an asset. It consists of items that are yet to be finished and sold. It differs from finished goods as they are items that are ready to be sold as-is.
For example, if you run a craft store that sells handmade jewelry like earrings, necklaces, bracelets, etc., the WIP inventory would refer to the products that are still under production or assembled by your production team.
WIP inventory is a universal concept that applies to every business size consisting of large product manufacturing businesses or direct-to-consumer businesses that run on a small scale.
What Does WIP Inventory Include?
Determining the cost of WIP inventory is slightly more complicated than the cost of finally finished goods. As there are many different components involved and many dynamic items, it can get slightly complicated. Here are a few of the terms and calculations you will need to know to determine the WIP inventory.
Beginning WIP Cost
The beginning WIP cost is usually the first step in determining the WIP inventory. It comprises the assets section in the previous accounting period. To determine and calculate the beginning WIP inventory, it is essential to decide on the ending WIP inventory of the last period. The ending WIP inventory is carried forward from the previous period to the new financial period.
Manufacturing costs are the total costs associated with the manufacturing of the final finished product. This essentially includes the cost of raw materials, labor, and overhead costs. If other expenditures go into the production process, they will also be included in the manufacturing cost.
If the WIP inventory is higher in the production process, then the manufacturing costs like raw materials and labor costs will be higher. This will eventually impact the final cost of the manufactured goods.
The formula for manufacturing costs is as follows –
Manufacturing Costs = Raw Materials + Direct Labor Costs + Manufacturing Overhead
Cost of Manufactured Goods
The third aspect of determining WIP inventory cost includes the cost of manufactured goods (COGM). COGM refers to the total costs required to manufacture a final product. You can calculate the COGM by summing the total manufacturing cost with the beginning WIP inventory costs. Finally, you will need to subtract the ending WIP inventory, which will give you the final cost of manufactured goods. The formula is as follows –
COGM = Total Manufacturing Costs + Beginning WIP Inventory – Ending WIP Inventory
How to Calculate Work in Progress – Formula
Once you have all the data mentioned above with you and have calculated your manufacturing cost and COGM, you can determine how much WIP inventory you have.
The formula for calculating WIP inventory is as follows –
Ending WIP Inventory = Beginning WIP Inventory + Manufacturing Costs – COGM
Outsourcing Manufactured Goods & Importance of Calculating WIP Inventory
In today’s day and age, you need to have a superior delivery experience along with expedited delivery options. Therefore, it has become essential to outsource your eCommerce fulfillment operations to 3PL fulfillment centers.
One such 3PL fulfillment company is Shiprocket Fulfillment. Shiprocket Fulfillment helps you deliver products quickly to customers by storing products in fulfillment centers located in significant cities across India. You not only deliver products 3X faster with Shiprocket Fulfillment, but you also save considerable amounts in the shipping costs. Along with that, you get exceptional fulfillment services and 99% accuracy in all of the operations.
Suppose you are a seller who takes care of their in-house manufacturing. In that case, it is vital to keep track of your WIP inventory, as you will need to continually stay in touch with the numbers that you are sending to your fulfillment center’s warehouse. In case the numbers are not correct, your entire inventory can be mismatched, and you will have to pay a hefty price in the form of a negative customer experience.
Hence, track your WIP inventory regularly to stay abreast of your inventory count. This will help you process orders faster.
WIP inventory is critical for the manufacturing and production supply chain. Make sure you keep a thorough track of it and maintain it to boost your eCommerce assets. For other fulfillment operations and end-to-end logistics and warehousing solutions, you have Shiprocket Fulfillment.