WIP Full Form: Understanding the Meaning and Importance!

Want to know WIP’s full form. Then this blog helps you to find all the information that you need to know! 

WIP full form is Work in Progress. Work-In-Progress (WIP) is a balance-sheet accounting entry that refers to the money spent on materials, procedures, and labor to make a product. It is more vital to work on critical, high-value work items than it is to keep workers occupied and fully used as well as it helps in task management. 

Make sure to check: What is Risk Mitigation? Know This Before It’s Too Late!

Meaning of WIP

Work in Progress is also known as “circulating inventory,” “work in progress,” or “work in progress.” The word covers all of the tasks that the team is currently working on. The limitation of WiP is the key difference between the Kanban method and other project management methods. 

As a result, team members are not able to take on an infinite number of tasks. When they exceed the boundaries of WiP, it indicates a capacity barrier or an issue with the process.

Importance of WIP

Work-in-progress (WIP) is an idea that originates in the Lean manufacturing movement. WIP is regarded as a kind of waste in both financial and operational terms: work that has been completed and paid for but provides no advantage to the customer or the organization.

In the area of software development, WIP is an even more serious problem. WIP imposes an additional tax on a software engineering team in the form of greater complexity and cognitive load, in addition to financial and operational complexities.

What Is Work in Progress Inventory?

Work in progress inventory includes all inventory kinds that are in the intermediate stage between raw materials inventory and finished products. WIP inventory is created when raw material is combined with direct labor but is not yet ready to be sold. 

How to Calculate Work in Process Inventory?

The total WIP inventory value is the sum of the ending work in process inventory for one accounting period and the commencing work in process inventory for the next accounting period. On a balance sheet, the ending inventory quantity is shown as a current asset.

For calculating the WIP inventory, you must first calculate the initial work in process inventory, and then calculate the ending work in process inventory.

Formula of WIP Inventory:

Ending WIP Inventory = (Beginning WIP Inventory + Production Costs) – Finished Goods Cost

How to Use WIP Inventory to Improve Inventory Management

WIP inventory is the most commonly disregarded of the three primary forms of inventory. However, as you will see, maintaining track of this parameter has significant advantages.

1. Recognize Red Signs Sooner:

Managers should be concerned about rising WIP inventory statistics. A high WIP inventory figure can suggest that your production process isn’t running properly and that there may be bottlenecks. By tracking WIP, you may identify and solve problems before they harm your bottom line.

2. Get A More Accurate Estimate of Your Company’s Worth:

Because WIP inventory is an inventory asset, failing to include it on your company’s balance sheet can result in an undervaluation of overall inventory. As a result, your finished goods will be overpriced. It is best to maintain WIP inventory for tax purposes to get an exact analysis of what your inventory is actually worth.

3. Avoid Manually Counting Inventory:

Some businesses perform a physical count of their WIP inventory to establish the value based on the current stage of each unit in the manufacturing process. This consumes a significant amount of important time and diverts your team’s attention away from higher-level tasks.

Using the WIP formula will provide you with an accurate estimate of the value of your inventory without the stress of hand-counting.

You may also check: A Beginner’s Guide to Lean Project Management!

Frequently Asked Questions