Work in progress (WIP) refers to goods; products; and / or services that are in the process of being manufactured; assembled; and provided but not yet completed.
Some examples of work in progress in different industries include:
- Manufacturing: WIP represents products that are being assembled, fabricated, or processed but are not yet ready for sale.
- Construction: WIP refers to ongoing construction projects that are not yet finished.
- Software development: WIP refers to partially completed software projects or applications that are undergoing development and testing before release.
- Service industry (i.e., consulting and professional services): WIP represents projects; assignments; and engagements that are in progress but not yet completed.
Monitoring and managing work in progress inventory is crucial for companies to maintain operational efficiency, meet production deadlines, and optimise resource utilisation. WIP is effectively cash that has not been realised yet and forms part of our working capital.
Having too much tied up in WIP may place cash flow pressures on the business, while not having enough may indicate that business is operating below its capacity, i.e., it does noy have enough work on.
WIP Days and Inventory Days is calculated as follows:
(Average WIP or Inventory / Cost of Goods Sold or Cost of Services Sold) * Number of Days
If you wanted to calculate the average amount of days that it took for your business to sell / turnover its services of inventory:
Inventory / WIP 30 June 2024 $250,000
Inventory WIP 30 June 2025 $225,000
Total Cost of Goods / Services Sold $2,500,000
($250,000 + $225,000) / 2 / 2,500,000 * 365 = 35 days.
Generally, the smaller the number of days the better.
If you would like to discuss further, please contact us:
McNamara & Company - Chartered Accountants, located minutes from the Melbourne CBD
www.mcnamaraandco.au/contact-us
Phone +61 3 9428 1062
Email admin@mcnamaraandco.au
Please refer to disclaimer at the bottom of the page.
