Calculate work in process
The cycle of work in process (WIP) is repeated in a manufacturing environment continuously. Inventory is moved from raw materials to work in process. Additional costs are added during each of the manufacturing processes when labor and overhead rates are applied. At the end of the production, cycle inventory and costs are moved to the finished goods account. Estimating work in process provides a clearer picture of the company’s inventory for financial reporting.
1. Move raw materials from the raw material inventory account to the work in process account as they are moved into the production area.
2. Record the raw materials used in the work in progress account, direct labor and manufacturing overhead rates as they apply to each step of the manufacturing process.
3. Know all of the processes and where raw materials are added. For example, are all the materials added in during step one? If so, then 100 percent of material cost would be complete when calculating work in process.
Are materials added equally throughout the production process? Find the average of completion as indicated in the following steps. Is one step in the production line more labor intensive than another or are they evenly distributed? Should more overhead be applied to one step because of the heavy equipment used? Are labor and overhead applied equally throughout the manufacturing process? Knowing the answers to these questions will help you determine whether your work in process goods are 25, 50 or 75 percent complete. You need this estimated percentage to calculate work in process.
4. Use the subjective assessment of the production manager for a rough estimate of completion percentage of the manufactured goods. The beginning balance of the work in process account is from the prior period’s work. You will add this period’s goods that are started, but not yet finished, to the work in process account. Then subtract the work that was finished this period for the work in process (WIP) account balance for this period.
5. Multiply the quantity of pieces that are in the manufacturing process, but not finished, by the percentage that they are complete. For our example, each step of a manufacturing process adds an equal amount of labor and overhead. Approximately one-third of the goods are 25 percent complete, one-third are 50 percent complete, and one-third are 75 percent complete.
6. Average the percentages of completion of work in process goods. In the example, the average percentage of completion is 50 percent for processes ((25+50+75)/3=50). Multiply the number of goods in process times and divide by the number of different completion times to get the completion percentage of 50 percent. Say, for example, that there are 1,000 pieces of work in process that are an average of 50 percent complete. Then their equivalent value is the same as 500 finished goods.
7. Multiply the 500 equivalent finished pieces by the individual total cost of that finished good. This number is your work in process value for the current accounting period.