Ending Work in Process

Work in process (WIP) are goods manufactured by a business which are only partially complete. At the end of an accounting period ending work in process is included as a current asset in the balance sheet under the heading of inventory, together with raw materials and finished goods.

Manufacturing Cycle

To understand how to calculate ending work in process it is necessary to look at the cycle of events which takes place when a business manufactures a product from raw materials.

The diagram below sets out a typical process.

Raw Materials
Beginning raw material inventory
+ Material purchases
– Materials transferred to production
= Ending raw material inventory
Work in Process
Beginning WIP inventory
+ Materials transferred to production
+ Direct labor
+ Applied overhead
– Cost of goods manufactured (COGM)
= Ending WIP inventory
Finished Goods
Beginning finished goods inventory
+ Cost of goods manufactured (COGM)
– Cost of goods sold (COGS)
= Ending finished goods inventory

The manufacturing process starts when raw materials are purchased from a supplier. Some of these materials are transferred out of raw materials into production and form part of work in process (highlighted in blue).

During production, labor and overheads are incurred in order to convert the raw materials to finished manufactured goods. The total cost of raw materials, labor and applied overheads is referred to as the manufacturing cost.

When the manufacturing process is complete and the goods are finished, the cost of the goods manufactured (COGM) is transferred out of work in process into finished goods (highlighted in green).

Finally, the finished goods are sold and the cost of goods sold (COGS) is transferred from finished goods inventory to the income statement.

How to Calculate Ending Work in Process

From the diagram below, it is now apparent that the ending work in process is the beginning work in process plus raw materials transferred in (blue row), plus the direct labor and applied overheads incurred to convert the materials to finished products, less the cost of the goods manufactured transferred out to finished goods.

Work in Process
Beginning WIP inventory
+ Materials transferred to production
+ Direct labor
+ Applied overhead
– Cost of goods manufactured (COGM)
= Ending WIP inventory

Ending Work in Process Formula

The ending work in process formula can now be stated is follows:

Ending WIP = Beginning WIP + Materials in + Direct Labor + Overheads – COGM

As the materials, direct labor, and applied overhead added together is the total manufacturing cost, the formula can be restated as follows:

Ending WIP = Beginning WIP + Manufacturing cost – COGM

* The cost of goods manufactured (COGM) is sometimes referred to as the cost of goods completed.

How to Calculate WIP Inventory Example

Suppose a business has beginning and ending raw material inventory of 20,000 and 30,000 respectively and purchases an additional 50,000 of raw materials during the accounting period.

Using this information we can calculate that the materials transferred into production as follows:

Ending materials = Beginning materials + Purchases - Transfers to production
Transfers to production = 20,000 + 50,000 - 30,000 = 40,000

This is summarized below:

Raw Materials
Beginning raw material inventory 20,000
+ Material purchases 50,000
– Materials transferred to production -40,000
Ending raw material inventory 30,000

We now know that the amount of raw material transferred into production is 40,000.

Suppose we also know that the beginning WIP inventory is 25,000, and that during the accounting period direct labor costs of 10,000 were incurred, overhead of 5,000 was applied and that the cost of goods manufactured transferred to finished goods was 45,000.

The ending work in process is now calculated using the work in process inventory formula as follows:

Ending WIP = Beginning WIP + Materials in + Direct Labor + Overheads - COGM
Ending WIP = 25,000 + 40,000 + 10,000 + 5,000 - 45,000
Ending WIP = 35,000

Again, this can be summarized as follows:

This is summarized below:

Work in Process
Beginning WIP inventory 25,000
+ Materials transferred to production 40,000
+ Direct labor 10,000
+ Applied overhead 5,000
– Cost of goods manufactured (COGM) -45,000
= Ending WIP inventory 35,000

The work in process at the end of the accounting period is calculated as 35,000.

Ending Work in Process March 10th, 2017Team

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