How to Calculate Work in Process Inventory

Written by gretchen freeman
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How to Calculate Work in Process Inventory
Work in Process inventory consists of goods still in the production stage. (Depository image by Czintos Ã--dön from Fotolia.com)

Process costing, most commonly used in companies that make uniform products from raw materials, assigns material, labour and manufacturing costs to finished products. These costs appear in multiple places on the company's financial reports, such as Inventory on the balance sheet and Cost of Goods Sold on the income statement.

The Work in Process account allows companies to track costs for a particular product as it is produced. Raw materials, direct and indirect labour and manufacturing overhead costs all add to the total value of the unfinished inventory until the goods are completed and ready to be sold.

Skill level:
Easy

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Instructions

  1. 1

    Record an entry debiting the Work in Process account and crediting the Raw Materials account for the total value of raw materials used each time materials are added to the production process. This entry decreases the amount of raw materials on hand and increases the value of the Work in Process for the unit being produced. For example, if £3,250 of raw materials are added in the Formulating Department of a soda company, the entry will look like this:

    Work in Process--Formulation.............................$5,000

     Raw Materials...................................................................$5,000
    
  2. 2

    Create a journal entry each time you pay employees who worked on the unit being produced. Debit the Work in Process account and credit the Salaries and Wages Payable account for the amount of work that applied directly to the production of goods. To record labour costs of £975 incurred in the same Formulating Department of the soda company, create the following entry:

    Work in Process--Formulating.............................$1,500

     Salaries and Wages Payable............................................$1,500
    
  3. 3

    Add the department's manufacturing overhead costs by debiting Work in Process and crediting Manufacturing Overhead using the predetermined overhead rate. To add manufacturing costs of £325 to the soda in production in the Formulating Department, enter:

    Work in Process--Formulating.............................$500

     Manufacturing Overhead...............................................$500
    
  4. 4

    Complete the process by transferring the total amount in Work in Process to the next department for further processing by debiting the Work in Process account for the next department and crediting the Work in Process account for the department the goods are leaving. After the final department completes production, debit the Finished Goods account and credit the Work in Process account for the final department. The total amount added to Work in Process throughout the production process becomes the product cost for all further inventory calculations. When the Formulating Department finishes its process, the entry to transfer the goods to the next department will appear as follows:

    Work in Process--Bottling.............................$7,000

     Work in Process--Formulating.....................................$7,000
    

Tips and warnings

  • Keep a separate Work in Process account for each department in the production line. This allows easy auditing of the department's efficiency and budget.

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