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How do we account for WIP inventory?

It may require a manual process, but WIP inventory can – and should -- be tracked to ensure accountability.

ERP inventory management systems do not keep track of work-in-process inventory simply because WIP is not identifiable...

inventory. It is no longer the components that were issued to the shop, but it's not yet the items being made.

WIP inventory is managed and tracked by the production control system within your ERP suite, which tracks by work order. As materials are issued to work orders and labor and overhead applied, the work order value increases until the completed items are transferred from production into inventory and their value is subtracted from the work order balance. Any residual value (positive or negative) after all the completed items are removed is manufacturing cost "variance."

In a very real sense, the work order value is equal to the WIP inventory value, which is continuously updated as shop floor activity reports are posted to the system. Therefore, it should not be necessary to physically count WIP value. Your production control application can produce a WIP value report at any time.

Nevertheless, some company accountants or auditors will insist on a physical count. There's no easy way to accomplish this. Someone will have to look at each and every work order in the shop, try to count the items on the work order (it could be difficult to clearly identify exactly what you're looking at, and individual units on the work order may be at different stages of completion.) Then a value must be assigned to each unit based on its material, labor and overhead accumulation at that stage.

Because physically counting WIP is not a routine activity, it is unlikely that your ERP system will be able to produce count lists or other supporting documents or processes. Using a database query tool, create your own count lists and leave a space to record actual counts. Reconciliation and record adjustment will likely be a manual process.

Work orders "flow" through the plant. WIP inventory is counted continuously as work orders are completed and reconciled. If manufacturing lead times are very long (months), and the transaction handling and tracking system is suspect, the WIP value could be in question. To avoid this problem, fix the transaction system so that a valid WIP status and value is available instantly, rather than use precious resources to perform a manual count. Long lead times can be the result of having too much WIP. Most companies could benefit from a WIP reduction effort (that also reduces manufacturing lead time), enabled through a work center queue analysis that is probably built in to your existing production control system.

Next Steps

Learn how to take control with cloud inventory management

Use desktop inventory management tools

Understand inventory optimization

This was last published in September 2015

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