Work-In-Progress Inventory &
Stage Of Completion Valuation
Q: I want to ask how do you calculate opening work in progress inventory and closing work in progress inventory... and whether this calculation should be in terms of raw material or taking into account stage of completion...
Actually I want to ask when you use sulphur to produce sulphuric acid, then it passes through two different processes - I want to know the work in progress inventory valuation in those process or stages. Can you please explain?
Hi Umer, first of all sorry for the big delay in answering your question.
There are a few ways I would value the inventory in your situation of having multiple stages or processes in creating a final product.
The first method I would consider is to value the product (sulphuric acid) according to the stage of completion method. According to this method you could estimate a percentage of completion of the product during stage 1 and stage 2. For example, you might estimate that after stage 1 it is 40% complete (therefore stage 2 is the remaining 60%). If you know the total manufacturing cost for both processes you can then calculate the value of work in progress after stage 1. For example, total manufacturing costs for both processes is $10,000 per batch. Then for one batch that has completed stage 1, its value is $4,000 (40% x $10,000).
Another method that could be used is simply adding up the costs. For example, if you know the cost per liter of sulphur (and any other chemicals) used to create a batch of sulphuric acid. You can then calculate the labor cost and overheads and add this to the cost of the raw materials (sulphur) - take the cost of operating the first process as a percentage of the factory. For example, the costs of operating the first process to create one batch as percentage of the factory is 10%. Total factory costs (electricity, water, etc.) is $3,000 per day. So work-in-progress inventory would be valued at $300 (10% x $3,000).
I hope that gives some insight into this subject. It is obviously up to each person how they choose to value their inventory when it goes through multiple processes like yours. Best of luck!