In manufacturing companies or businesses (Also see Useful Accounting Practices for Small Businesses), their inventories will be divided into three main categories, which are the raw materials, work in process, as well as the finished goods. In today’s article, we will focus on the second one, the work in process.
In accounting (Also see Work in Process Accounting), work in process is the cost of production of partly finished goods. Apart from the cost of raw materials, it also includes labour costs and extra overhead expenses that a business has spent on the production of incomplete products. As the levels of spoilage and scraps vary in this stage, it is normal if business owners are unable to calculate the work in process accurately. Nevertheless, the work in process is still crucial in the company’s income statement because the amount of cash being tied up in the incompleted products or goods can be substantial in some cases.
Hence, business owners (Also see Tricks From Millionaire Business Owners) need to make sure that they have accounted for the amounts associated with work in process accurately as most of the time, it is closely related to the cash flow of the company. If they are not confident that they can cope with these complicated accounting jobs well, hiring an accounting firm in Johor Bahru is a good way to solve this problem.
Typically, most companies would measure the work in process at the end of the accounting period. They will determine the accurate value of the unfinished goods that are still in the manufacturing process. As soon as the production process has ended, they will transfer the cost to the finished goods account before moving it to the cost of goods sold (COGS).
However, note that not all businesses (Also see How Can You Improve Your Business?) need to account for the work in process, especially the companies that do not need a long time in the production process. As an instance, in the restaurants, the chefs will transform the ingredients quickly to finished products. Hence, the cooking ingredients will change from raw materials to finished goods directly.
Most of the time, production management will try to cut down the work in process as much as it can. This is because the work in process needs storage space, and it represents that part of the company’s capital is being tied up, which causes the company to have fewer funds to be invested. In some industries, there is a risk that the work in process will cause the life span of perishable goods to be reduced too. Thus, if the management can minimise work in process, it means that the company may not need to spend a large amount of overhead expenses on storage spaces. At the same time, the possibility of paying for expiring products will reduce too.