Work-in-progress (WIP) is the capital that has already been incurred in the production process and is not yet turned into finished production. It varies with the removal of materials, the use of labour, completion of operations and application of manufacturing overhead. ERP software UK can track these movements in real time, providing business owners with a clearer picture of the value of production and financial risk.

When companies have multiple stages of manufacturing, WIP valuation is not just an accounting activity. It bridges the gap between shopfloor activities and inventory costing, profitability and financial reporting.

 Why is it difficult to value WIP?

If production runs through multiple operations, or there is more than one reporting period for the same production, then WIP becomes difficult to calculate. Manual calculations may rely on production updates, spreadsheets and accounting adjustments which do not necessarily reflect the latest activity.

Some of the common variables used in valuation are:

•  Notional raw materials allocated to the production.
•  Direct labour consumed
•  This cost includes the costs of the machine and the operation.
•  Applied manufacturing overhead
•  Completed quantities
•  Losses from scrap and production.
•  Partially completed operations

If these values are not integrated in manufacturing software solutions, these can be spread across production, stocks and finance records.

 Record the actual consumption of materials

Accurate WIP valuation is based on accurate material consumption data. For any issue of a component against a production order, the cost should be recorded in the cost of the manufacturing activity to which the order is assigned.

 Link inventory problems with production orders

An ERP system can be linked to a unique work order, operation or finished good to each material transaction. This will enable traceability of movement in the warehouse to the production cost.

When the system is applied using standard or actual costing, it can do so with the correct valuation method, but with the same underlying transaction history. ERP software UK thus eliminates the need for manually worked out material balances at the end of the month.

 Monitor labour and machine usage.

Materials is just one component of WIP. For partially completed products, especially in manufacturing industries with long production runs, labor and machines can have a significant impact on value.

Time of employees, machine time, setup time and operating times can be recorded on production orders. The system can then use the predefined rates to determine the cost that has been incurred at each stage.

This method provides the management with more information about the location of the production expenditure and not just the total value of the materials consumed.

 Determine Work in Progress (WIP) by Production Stage

A production order can become quite complicated and consist of multiple operations, each of which adding different values. A partially completed order can thus not necessarily be valued by comparing material issued with completed output.

 Use operation-level costing

Today's manufacturing software systems are able to link costs to individual operations and work centres. For instance, cutting, machining, assembly, testing and finishing could have different labour, machine and overhead costs.

This way, the business can figure out the amount of value that has been added until the ultimate product makes it to the inventory. It also provides an indication of production orders for which disproportionately high costs have been incurred without progress.

 Apply overhead consistently

Some of the items in manufacturing overhead may be utilities, facility costs, depreciation, maintenance, supervision, and indirect production costs. The failure to include these costs or inconsistent application of these costs can lead to distortion of the profitability of products and WIP.

Overhead rates or allocation rules based on labour hours, machine hours, production volume or any other appropriate cost driver can be added into an ERP environment.

The aim is not only to raise the value of WIP but also to use a common costing system that is based on the accounting policy of the organisation.

 Connect WIP to Inventory valuation.

WIP sits in between the raw materials and finished goods, and its valuation should stay related with inventory transactions. The cost accumulated should flow correctly along the manufacturing flow when an operation has been finished.

A connected system can differentiate between:

•  Raw material inventory
•  WIP inventory
•  Finished goods
•  Scrap or reject product
•  Production variances

This results in a more transparent inventory position and in minimizing the amount of reconciliation between production and finance departments.

 Enhance month end financial control.

When the WIP transactions are captured continuously, rather than being a reconstruction of all transactions at the end of an accounting period, then the month-end reporting becomes more reliable.

 Minimize manual valuation adjustments.

Real-time production records provide finance teams with a clearer picture of the production orders that are still open, costs that have been incurred, production completion percentages and outstanding operations prior to the production period being closed.

ERP software UK can give reports on the orders that add to WIP, cost accumulated and where production variances need investigating. This provides the business owner with more information to report to management and for financial decision making.

 Detect production variances earlier

Abnormal cost behaviour is also more readily identified with real-time valuation. If a production order is using up a lot more material or labour than anticipated, then it can be investigated during the active production order.

Useful indicators include:

•  Labour-hour variance
•  Machine-time variance
•  Overhead variance
•  Scrap-related cost
•  WIP ageing

If the problem is caught early enough, production managers can have a look at the process steps for inefficiencies before they are reflected in finished-goods cost.

 Improve audits and governance

Accurate WIP valuation requires more than automated calculations. All costs should be assigned to the source transaction.

Sowaan ERP can be used to implement a single data structure that keeps manufacturing, inventory and financial transactions linked. Role-based access and transaction logging may also be helpful in managing access and changing production records or costing information.

This provides better audit trails and minimizes the chances for discrepancies between operational and financial records for business owners.

 Apply WIP data to make strategic decisions

WIP data can provide more information than the value of unfinished goods. Bottlenecks, poor scheduling, long procurement cycles, too many batches, or inefficient production processes can all be a sign of WIPs that are taking too long.

It's easier to identify where working capital is going when management can see the WIP by product, work centre, production order and ageing period.

 Conclusion

Real-time WIP valuation is the process of tying production activity to financial control. Through real-time tracking of all the above, ERP software UK provides manufacturing companies with a more accurate picture of the unfinished inventory.

The integration of manufacturing applications and accurate costing can enhance reporting, reveal inefficiencies in the manufacturing process and provide better working capital management for complex manufacturers.