Work in process

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Work in process or work-in-process, (WIP), [1] [2] [3] [4] work in progress (WIP), [5] [6] [7] goods in process, [1] or in-process inventory refers to a company's partially finished goods waiting for completion and eventual sale, or the value of these items. [8] The term is used in supply chain management, and WIP is a key input for calculating inventory on a company's balance sheet. In lean thinking, inappropriate processing or excessive processing of goods or work in process, "doing more than is necessary", is seen as one of the seven wastes (Japanese term: muda ) which do not add value to a product. [9] [10]

Contents

WIP inventory in supply chain management

WIP inventory calculations can help a company assess their supply chain health and guide in supply chain planning. [11] In most cases, it is ideal to have low WIP inventory levels, [11] and companies that manage their inventory level efficiently tend to have lower costs. [12] Managing WIP inventory requires coordination between several functions within a company, as well as with suppliers and customers. [12] Higher WIP inventory levels are advantageous in that they can support a surge in demand, as well as improve cycle time since there is more material in production. However, this can also increase storage costs and obsolescence risk, as well as lead to waste if demand is lower than expected. [13] To mitigate these risks, companies are increasingly turning to demand forecasting software. These tools analyze historical data, market trends, and customer behavior to predict future demand with greater accuracy. This allows companies to optimize WIP levels, ensuring they have enough material to meet anticipated demand without carrying excessive inventory that could become obsolete. [14]

WIP inventory in accounting

WIP inventory refers to goods that are in production and not yet a finished good. [15] On the balance sheet, WIP inventory is aggregated into the inventory line under current assets along with raw materials and finished goods. [16]

To calculate WIP inventory at the end of an accounting period, the following 3 figures are required: beginning WIP inventory, production costs, and finished goods. Beginning WIP inventory is the WIP inventory figure from the previous accounting period. Production costs includes all costs associated with manufacturing a product, such as raw materials, labor, and overhead costs. Finished goods is the total value of goods ready for sale in the current accounting period. The formula for calculating WIP inventory is as follows: beginning WIP inventory + production costs – finished goods. [11]

Tax treatment

In the United Kingdom, HMRC has no specific definition of work-in-process, but three different types of uncompleted items are identified for tax purposes:

Related Research Articles

<span class="mw-page-title-main">Supply chain management</span> Management of the flow of goods and services

In commerce, supply chain management (SCM) deals with a system of procurement, operations management, logistics and marketing channels, through which raw materials can be developed into finished products and delivered to their end customers. A more narrow definition of supply chain management is the "design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronising supply with demand and measuring performance globally". This can include the movement and storage of raw materials, work-in-process inventory, finished goods, and end to end order fulfilment from the point of origin to the point of consumption. Interconnected, interrelated or interlinked networks, channels and node businesses combine in the provision of products and services required by end customers in a supply chain.

Business is the practice of making one's living or making money by producing or buying and selling products. It is also "any activity or enterprise entered into for profit."

<span class="mw-page-title-main">Cost</span> Money spent to produce or procure goods or services

Cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this case, money is the input that is gone in order to acquire the thing. This acquisition cost may be the sum of the cost of production as incurred by the original producer, and further costs of transaction as incurred by the acquirer over and above the price paid to the producer. Usually, the price also includes a mark-up for profit over the cost of production.

<span class="mw-page-title-main">Inventory</span> Goods held for resale

Inventory or stock refers to the goods and materials that a business holds for the ultimate goal of resale, production or utilisation.

<span class="mw-page-title-main">Lean manufacturing</span> Methodology used to improve production

Lean manufacturing is a production method aimed primarily at reducing times within the production system as well as response times from suppliers and to customers. It is closely related to another concept called just-in-time manufacturing. Just-in-time manufacturing tries to match production to demand by only supplying goods which have been ordered and focuses on efficiency, productivity, and reduction of "wastes" for the producer and supplier of goods. Lean manufacturing adopts the just-in-time approach and additionally focuses on reducing cycle, flow, and throughput times by further eliminating activities which do not add any value for the customer. Lean manufacturing also involves people who work outside of the manufacturing process, such as in marketing and customer service.

Kaizen is a concept referring to business activities that continuously improve all functions and involve all employees from the CEO to the assembly line workers. Kaizen also applies to processes, such as purchasing and logistics, that cross organizational boundaries into the supply chain. It has been applied in healthcare, psychotherapy, life coaching, government, manufacturing, and banking.

In economics, overproduction, oversupply, excess of supply or glut refers to excess of supply over demand of products being offered to the market. This leads to lower prices and/or unsold goods along with the possibility of unemployment.

Working capital (WC) is a financial metric which represents operating liquidity available to a business, organisation, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Gross working capital is equal to current assets. Working capital is calculated as current assets minus current liabilities. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit and negative working capital.

<span class="mw-page-title-main">Operations management</span> In business operations, controlling the process of production of goods

Operations management is concerned with designing and controlling the production of goods and services, ensuring that businesses are efficient in using resources to meet customer requirements.

A lead time is the latency between the initiation and completion of a process. For example, the lead time between the placement of an order and delivery of new cars by a given manufacturer might be between 2 weeks and 6 months, depending on various particularities. One business dictionary defines "manufacturing lead time" as the total time required to manufacture an item, including order preparation time, queue time, setup time, run time, move time, inspection time, and put-away time. For make-to-order products, it is the time between release of an order and the production and shipment that fulfill that order. For make-to-stock products, it is the time taken from the release of an order to production and receipt into finished goods inventory.

Muda is a Japanese word meaning "futility", "uselessness", or "wastefulness", and is a key concept in lean process thinking such as in the Toyota Production System (TPS), denoting one of three types of deviation from optimal allocation of resources. The other types are known by the Japanese terms mura ("unevenness") and muri ("overload"). Waste in this context refers to the wasting of time or resources rather than wasteful by-products and should not be confused with Waste reduction.

<span class="mw-page-title-main">Push–pull strategy</span> Business terms

The business terms push and pull originated in logistics and supply chain management, but are also widely used in marketing and in the hotel distribution business.

<span class="mw-page-title-main">Value-stream mapping</span> Lean-management method for analyzing the current state and designing a future state

Value-stream mapping, also known as material- and information-flow mapping, is a lean-management method for analyzing the current state and designing a future state for the series of events that take a product or service from the beginning of the specific process until it reaches the customer. A value stream map is a visual tool that displays all critical steps in a specific process and easily quantifies the time and volume taken at each stage. Value stream maps show the flow of both materials and information as they progress through the process.

Overstock, excessive stock, or excess inventory arise when there is more than the "right quantity" of goods available for sale, or when "the potential sales value of excess stock, less the expected storage costs, does not match the salvage value". It arises as a result of poor management of stock demand or of material flow in process management. Excessive stock is also associated with loss of revenue owing to additional capital bound with the purchase or simply storage space taken. Excessive stock can result from over delivery from a supplier or from poor ordering and management of stock by a buyer for the stock. Excess or unnecessary inventory is listed as one of the seven wastes or "muda" in Taiichi Ohno's Toyota production system.

Backflush accounting is a subset of management accounting focused on types of "postproduction issuing;" It is a product costing approach, used in a Just-In-Time (JIT) operating environment, in which costing is delayed until goods are finished. Backflush accounting delays the recording of costs until after the events have taken place, then standard costs are used to work backwards to 'flush' out the manufacturing costs. The result is that detailed tracking of costs is eliminated. Journal entries to inventory accounts may be delayed until the time of product completion or even the time of sale, and standard costs are used to assign costs to units when journal entries are made. The backflushing transaction has two steps: one step of the transaction reports the produced part which serves to increase the quantity on-hand of the produced part and a second step which relieves the inventory of all the component parts. Component part numbers and quantities-per are taken from the standard bill of material (BOM). This represents a huge saving over the traditional method of a) issuing component parts one at a time, usually to a discrete work order, b) receiving the finished parts into inventory, and c) returning any unused components, one at a time, back into inventory.

Lean Six Sigma is a process improvement approach that uses a collaborative team effort to improve performance by systematically removing operational waste and reducing process variation. It combines Lean Management and Six Sigma to increase the velocity of value creation in business processes.

Lean IT is the extension of lean manufacturing and lean services principles to the development and management of information technology (IT) products and services. Its central concern, applied in the context of IT, is the elimination of waste, where waste is work that adds no value to a product or service.

Lean services is the application of lean manufacturing production methods in the service industry. Lean services have among others been applied to US health care providers and the UK HMRC.

<span class="mw-page-title-main">Kanban (development)</span> Software development methodology

Kanban is a lean method to manage and improve work across human systems. This approach aims to manage work by balancing demands with available capacity, and by improving the handling of system-level bottlenecks.

Lean CFP Driven is a new approach which takes into account not only the widely implemented Lean manufacturing, but combines the principles of Lean with the Operating Curve, an approach based on the theoretical approach of queuing theory developed in academia in the 1970s. The goal of Lean CFP Driven is to eliminate waste in order to achieve higher quality, increase productivity and at the same time understand the relationship between utilization, lead time and variability in order to maximize performance within the semiconductor industry.

References

  1. 1 2 "Work-in-process dictionary definition | work-in-process defined". business.yourdictionary.com. Retrieved 2014-07-12.
  2. ↑ "WORK IN PROCESS DEFINITION". ventureline.com. Retrieved 2014-07-12.
  3. ↑ "What is work in process? definition and meaning". businessdictionary.com. Archived from the original on 2019-12-05. Retrieved 2014-07-12.
  4. ↑ "Work in Process financial definition of Work in Process". financial-dictionary.thefreedictionary.com. Retrieved 2014-07-12.
  5. ↑ "Collins English Dictionary | Always Free Online". collinsdictionary.com. Retrieved 2014-07-12.
  6. ↑ "Work In Progress (WIP) Definition | Investopedia". investopedia.com. Retrieved 2014-07-12.
  7. ↑ "What Is Work-In-Progress (WIP)? | Finance Strategists". Finance Strategists. financestrategists.com. Retrieved 2020-11-11.
  8. ↑ "W - Wage to WTO (World Trade Organisation) - Dictionary". tuition.com.hk. Retrieved 2014-07-12.
  9. ↑ EKU Online, The Seven Wastes of Lean Manufacturing, Eastern Kentucky University, accessed 6 March 2023
  10. ↑ McDonald, M. P., Inappropriate Processing: Muda matters in IT, Gartner, published 9 October 2009, accessed 7 March 2023
  11. 1 2 3 "What is Work in Process (WIP) Inventory & How to Calculate It". Ware2Go. 2021-08-25. Retrieved 2022-07-13.
  12. 1 2 "What is Work in Process (WIP) in logistics? - SCM EDU". 2019-04-23. Retrieved 2022-07-13.
  13. ↑ "WIP Inventory | Advantages and Disadvantages of WIP Inventory". EDUCBA. 2020-10-26. Retrieved 2022-07-13.
  14. ↑ Dekhne, Ashutosh; Lange, Tim; Magnus, Karl-Hendrik; Scheringer, Isabell; Vincken, Simon. "Retail and Consumer Packaged Goods:Better service with connected inventory" (PDF). McKinsey.com. McKinsey & Company.
  15. ↑ "What Work-in-Progress Really Means". Investopedia. Retrieved 2022-07-13.
  16. ↑ Schmidt, Jeff. "Inventory". Corporate Finance Institute. Retrieved 2023-03-07.
  17. ↑ HMRC, Business Income Manual, section 33020 - Stock: meaning of: work in progress, accessed 24 January 2018
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