Work in process is an inventory category used by manufacturing companies to track products in production. It appears as an asset on the balance sheet and includes raw materials, labor, and overhead costs. Proper management allows for efficient use of resources and inventory turnover rates.
Work in process, also known as work in process, is an inventory category commonly used by manufacturing companies. It allows a company to keep track of products that are at some stage of production but not yet ready for sale. This category appears as an asset on the company’s balance sheet and includes a valuation of raw materials, labor, and factory overhead costs that are associated with production at the time the company’s financial statements are generated.
Inventory management is a critical part of manufacturing companies’ business operations. Typically, a manufacturer has a significant portion of its financial resources tied to its inventory and production process. Generally, the production process spans financial reporting periods. To generate accurate financial reports that reflect the state of the company’s assets and liabilities, the company must have a way to identify and quantify assets that are not raw materials waiting to be used or finished products waiting to be sold.
A manufacturer uses three categories of inventory to track its assets for accounting purposes: raw materials, work in process, and finished goods. The work-in-process category is a warehouse account that allows the company to value tied resources in the production phase. Without this account, a portion of the company’s resources would be invisible until the assets reached the finished product stage.
The account is listed in the assets section of the company’s balance sheet. Quantitatively, the category is made up of the raw materials used plus the labor costs and overhead costs required in the production of the goods in process. These components are valued at cost or realizable value, whichever is lower. It is important not to value work-in-process goods at retail cost or finished goods cost, because this type of valuation is speculative and can inflate the company’s assets. Profits should not be carried on the balance sheet until the amounts are recognized or received.
Correct management of work-in-process allows a manufacturer to invest the right amount of financial resources in raw materials and not overspend. Raw materials that are in inventory, awaiting processing, represent money that the company cannot use to pay other bills. The account can be used to determine inventory turnover rates. This type of information is critical to allowing a company to keep track of customer orders without generating overstocks or stockouts.
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