How to calculate ending work in process inventory
Ending Work in Process (WIP) Inventory is an important measure in accounting and manufacturing operations. It reflects the value of partially completed goods that are still in the production process at the end of an accounting period. Calculating ending WIP inventory is essential for accurate cost and production management, as well as financial reporting. In this article, we will explain the steps to calculate the ending work in process inventory for a manufacturing company.
Step 1: Determine the Beginning WIP Inventory
The first step is to identify the beginning WIP inventory for the accounting period. This can typically be found on your company’s balance sheet from the previous period. If you don’t have a beginning WIP value, you can use zero as your starting point if your company has either just started producing items or has not previously tracked this figure.
Step 2: Calculate the costs incurred during production
Next, determine all costs incurred during the production process for the given period. These costs include direct material, labor, and manufacturing overhead costs. You will need financial statements and records of expenses related to production during the accounting period.
Step 3: Add the total manufacturing costs to beginning WIP inventory
To calculate a preliminary figure for ending work in process inventory, add the total manufacturing costs incurred during production (from Step 2) to your beginning work in process inventory (from Step 1). This sum represents your total cost of work in process throughout the given accounting period.
Step 4: Determine costs of goods completed during the accounting period
The next step is to identify how much it cost to complete goods during this same time frame. This cost can be calculated based on information from your income statement or cost sheet by taking into account materials, labor, and overhead absorbed by completed goods.
Step 5: Subtract completed goods cost from total WIP costs
Now that you have calculated the costs associated with goods completed during the accounting period, subtract this amount from the total cost of work in process (from Step 3). The resulting figure is your ending work in process inventory.
Ending WIP Inventory = Beginning WIP Inventory + Total Manufacturing Costs – Completed Goods Cost
Calculating the ending work in process inventory is an important aspect of managing a manufacturing business. It helps organizations track and control costs, assess production efficiency, and provide accurate financial statements. By following these five steps, businesses can determine their ending WIP inventory and make more informed decisions regarding production processes.