How to Calculate Manufacturing Work in Progress
A manufacturing process has three phases: raw materials, work-in-progress and finished products. The cost of production can be separated into these stages; however, most of the total manufacturing cost is allocated to the work-in-progress phase.
What is Work in Progress?
Work-in-progress inventory is the amount of money spent on the units of products in various stages of completion but are still sitting on the production floor. Some raw materials, direct labor and manufacturing overhead costs have been consumed, but the products are not fully completed and cannot be moved into finished goods inventory.
As an example, let’s consider the costs of manufacturing for Buck’s Bus Company to find the work-in-progress inventory. The following is a list of the annual costs for the major components that go into making those yellow, school buses:
Raw Materials Inventory
Start with an initial raw materials inventory at the beginning of the year for body parts, engines, transmissions and seats. Add the purchases made during the year and subtract the ending inventory to find the amount of raw materials used in production:
- Beginning inventory $35,400
- Plus purchases $3,125,000
- Minus ending inventory $104,400
- Total raw materials costs $3,056,000
The cost of raw materials consists of the following parts:
- Body parts $1,278,000
- Engines $862,000
- Transmissions $647,000
- Seats $269,000
- Total raw materials costs $3,056,000
Workers use forklift trucks to move the boxes and pallets of parts and materials from the warehouse onto the production floor.
Direct Labor Costs
Direct labor is used on the production floor to assemble the various parts and install the engines, transmissions and seats. Welders weld the body parts to the frame, and mechanics bolt everything else together.
Direct labor costs for the year was $985,000.
Manufacturing Overhead Costs
Manufacturing overhead are those expenses not directly related to manufacturing the buses. These cost are salaries for production supervisors, maintenance workers, sanitation personnel and other indirect expenses as follows:
- Indirect labor $18,750
- Indirect materials $9,450
- Marketing expenses $12,300
- Selling & General Administrative $8,350
- Utilities $2,800
- Insurance $1,900
- Taxes $3,800
- Depreciation $11,000
- Total overhead costs $68,350
At the beginning of the accounting period, the company had 136 partially completed buses on the production floor. These buses had a cost value of $2,856,000. The average completion rate for all of the buses was 50 percent.
During the year, another $4,109,350 in costs flowed into the production of the buses.
- Raw materials $3,056,000
- Labor $985,000
- Manufacturing overhead $68,350
- Total WIP costs $4,109,350
For the year, the company completed the production of 105 buses with a total cost value of $4,403,350, or $41,937 each. The calculation to find the work-in-progress inventory at the end of the year is as follows:
- Beginning work-in-progress inventory $2,856,000
- Add total WIP costs $4,109,350
- Subtract cost of finished buses $4,403,350
- WIP inventory at end of year $2,562,000
Production employees drive the finished buses off the assembly line and into the outside storage lot to await delivery to customers.
Calculating the Final Inventories
In this example of the manufacturing process for Buck’s Bus Company, the final inventories for raw materials and work-in-progress inventory are as follows:
- Raw materials $104,400
- Work-in-progress inventory $2,562,000
The ending work-in-progress inventory value of $2,562,000 represents 122 buses in various states of completion and sitting on the production floor.
What’s the Relevance?
Business managers and analysts monitor a company’s work-in-progress inventory to make sure that costs are being properly allocated, and the production process is running smoothly. Customers will not buy partially completed buses, so it is important for a business to keep its WIP as low as possible.