WIP includes raw materials, machines, labor and overhead costs required for incomplete products of the production processes. Calculating the amount of WIP is even more challenging when you are clueless about the percentage of product completion as well as what is in store. Here are some issues you may encounter with WIP.
It is obvious that your unfinished goods will need storage and warehousing. They might pile up in your inventory and take up space before being proceeded for completion.
During this period, you might need to spend more for the labor and utilities required to preserve them until they are ready to be sold.
An excess WIP inventory might hold up the flow of work in the production process. Why is that? Imagine when your production line is full of WIP waiting to be processed, wouldn’t that result in a slow production rate? Probably.
Wondering where WIP comes into play in this? It is simple. The higher WIP you used to produce an item, the higher its cost is. If you are not clear about the amount of WIP for a single product, it is likely that you won’t be able to indicate its price correctly.
Such a simple mistake can get your customers to reconsider the idea of buying your goods, in turn decreasing your sales.