How to Calculate Ending Work in Process Without COGM

Work-in-process (WIP) inventory represents the value of partially completed goods in manufacturing. It reflects direct materials, direct labor, and manufacturing overhead costs accumulated for products still undergoing production. Businesses often need to determine this inventory’s value at period-end. While Cost of Goods Manufactured (COGM) is a common approach, it may be unavailable. This article outlines direct methods for calculating ending WIP inventory without relying on COGM.

Key Components of Work-in-Process Inventory

Understanding the cost elements of work-in-process inventory is essential for accurate valuation. The three primary components are direct materials, direct labor, and manufacturing overhead. Each contributes to the value of goods as they move through production.

Direct materials are raw substances directly traceable to the finished product, like wood. Direct labor represents wages paid to employees directly converting raw materials into finished goods, such as assembly line workers.

Manufacturing overhead encompasses all other indirect production costs not classified as direct materials or direct labor. This includes indirect materials, indirect labor (e.g., factory supervisors’ salaries), utilities, rent, and equipment depreciation. These three cost types are continually added to the work-in-process inventory account.

Calculating Ending Work-in-Process in Job Order Costing

Job order costing is a system used by businesses that produce unique or custom-made products or services, such as specialized machinery or custom furniture. In this system, costs are tracked for each individual job. Direct materials, direct labor, and manufacturing overhead are assigned to specific job cost sheets, which serve as detailed records for each project.

To determine the ending Work-in-Process inventory, a business identifies all jobs that remain incomplete at the end of the accounting period. The total cost accumulated for each unfinished job is then summed. For instance, if a custom cabinet maker has three jobs in progress at month-end: Job A with $1,500, Job B with $2,200, and Job C with $800, the ending WIP inventory would be the sum of these amounts, totaling $4,500.

Calculating Ending Work-in-Process in Process Costing

Process costing is a system for companies that mass-produce homogeneous products through continuous production steps, such as chemicals or textiles. A central concept is “equivalent units of production,” which converts partially completed units into fully completed units for cost allocation. This allows assigning costs to products at various stages of completion. Two primary methods calculate ending Work-in-Process inventory: the Weighted-Average method and the FIFO (First-In, First-Out) method.

Weighted-Average Method

The Weighted-Average method combines beginning work-in-process inventory costs with current period costs. It treats all units as if they began and were completed during the current period for costing.

To calculate ending WIP, determine the equivalent units of production for direct materials and conversion costs (direct labor plus manufacturing overhead) in the ending WIP inventory. Multiply the number of physical units in ending WIP by their percentage of completion for each cost component. For example, if a department has 1,000 units in ending WIP that are 100% complete for materials and 60% complete for conversion costs, this translates to 1,000 equivalent units for materials and 600 equivalent units for conversion costs.

Next, total costs (beginning WIP and current period costs) are divided by total equivalent units of production (units completed plus equivalent units in ending WIP) to determine an average cost per equivalent unit for materials and conversion costs. If total material costs are $10,000 and total equivalent units for materials are 10,000, the cost per equivalent unit for materials is $1.00. Similarly, if total conversion costs are $15,000 and total equivalent units for conversion are 7,500, the cost per equivalent unit for conversion is $2.00.

Finally, the cost of ending WIP inventory is calculated by multiplying the equivalent units in ending WIP by their average costs per equivalent unit. Using the previous example, the ending WIP would be (1,000 equivalent units of materials $1.00) + (600 equivalent units of conversion $2.00) = $1,000 + $1,200 = $2,200.

FIFO (First-In, First-Out) Method

The FIFO method assumes beginning work-in-process inventory units are completed before current period units. It distinguishes between prior period costs (for beginning WIP) and current period costs.

To calculate ending WIP, equivalent units for ending WIP are determined only by work performed on these units during the current period. For example, if 1,000 units in ending WIP are 100% complete for materials and 60% complete for conversion costs, the equivalent units are calculated directly as 1,000 for materials and 600 for conversion, assuming these units were started and partially completed in the current period.

The cost per equivalent unit is calculated using only current period costs, divided by equivalent units produced during the current period. If current material costs are $9,000 and equivalent units for materials are 9,000, the cost per unit is $1.00. If current conversion costs are $14,000 and equivalent units for conversion are 7,000, the cost per unit is $2.00.

Ending WIP inventory is found by multiplying equivalent units in ending WIP by the current period’s cost per equivalent unit for each component. Using the example, ending WIP is (1,000 materials $1.00) + (600 conversion $2.00) = $1,000 + $1,200 = $2,200.