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Start with an initial raw materials inventory at the beginning of the year for body parts, engines,
transmissions and seats. Add the purchases made during the year and subtract the ending inventory
to find the amount of raw materials used in production:
Workers use forklift trucks to move the boxes and pallets of parts and materials from the warehouse
onto the production floor.
Direct labor is used on the production floor to assemble the various parts and install the engines,
transmissions and seats. Welders weld the body parts to the frame, and mechanics bolt everything
else together.
Manufacturing overhead are those expenses not directly related to manufacturing the buses. These
cost are salaries for production supervisors, maintenance workers, sanitation personnel and other
indirect expenses as follows:
During the year, another $4,109,350 in costs flowed into the production of the buses.
Raw materials $3,056,000
Labor $985,000
Manufacturing overhead $68,350
Total WIP costs $4,109,350
For the year, the company completed the production of 105 buses with a total cost value of
$4,403,350, or $41,937 each. The calculation to find the work-in-progress inventory at the end of the
year is as follows:
Production employees drive the finished buses off the assembly line and into the outside storage lot
to await delivery to customers.
In this example of the manufacturing process for Buck's Bus Company, the final inventories for raw
materials and work-in-progress inventory are as follows:
The ending work-in-progress inventory value of $2,562,000 represents 122 buses in various states
of completion and sitting on the production floor.
Business managers and analysts monitor a company's work-in-progress inventory to make sure that
costs are being properly allocated, and the production process is running smoothly. Customers will
not buy partially completed buses, so it is important for a business to keep its WIP as low as
possible.