Inventory and costing
Work order (WO)
A work order is an internal document that authorises and details the specific tasks, materials and labour required to manufacture a product or complete a service.
What is Work order?
When a customer places an order or your stock levels drop below a certain threshold, you need a structured way to initiate production or service delivery. A work order serves as this formal instruction. It tells your production team exactly what needs to be built, repaired or serviced. You will typically generate a work order from a sales order or a bill of materials. It outlines the raw materials required, the step-by-step instructions for the task and the estimated time it should take. By acting as a central reference point, it ensures that your staff know their responsibilities and your inventory system can correctly allocate components. Once the job is finished, the work order is closed, allowing you to record the actual time and materials used against your initial estimates.
How Work order works
The process begins when a requirement is identified, either from a confirmed customer request or an internal need to replenish stock. A manager or automated system creates the work order, assigning a unique tracking number and specifying the exact items to be produced. Next, the inventory department reviews the document to allocate the necessary raw materials. If stock is insufficient, a purchase order must be raised first. Once materials are ready, the production team executes the tasks outlined in the document. Workers log their hours and any additional materials consumed during the process. Finally, a supervisor reviews the completed job, updates the inventory records to reflect the finished goods and closes the work order. This final step transfers the accumulated costs into your inventory valuation.
- Identify the production requirement from a sales order or stock alert.
- Draft the document detailing tasks, required materials and assigned personnel.
- Allocate raw materials from your inventory based on the bill of materials.
- Execute the production tasks while recording actual labour hours and material usage.
- Close the document and update your stock records with the finished goods.
Worked example
Gulf Furniture Manufacturing receives a sales order for 10 custom wooden dining tables. The production manager creates a work order detailing the requirement. The bill of materials specifies that each table needs 5 square metres of oak wood (costing $40 per square metre) and 3 hours of labour (at $20 per hour).
For 10 tables, the work order allocates 50 square metres of oak wood ($2,000) and 30 hours of labour ($600). Upon completion, the total cost recorded on the work order is $2,600. This amount is then transferred to the finished goods inventory, establishing a unit cost of $260 per table.
Why it matters for your business
Using work orders brings discipline to your production and servicing processes. Without them, you risk wasting raw materials, misallocating labour and losing track of your true manufacturing costs. A clear work order ensures that every team member understands their specific tasks, which reduces errors and delays on the shop floor. Furthermore, these documents provide a vital paper trail for cost accounting. By comparing the estimated costs on the work order with the actual materials and time consumed, you can identify inefficiencies in your operations. Paper & Pen tracks stock and posts journal entries, helping you maintain accurate inventory valuations as work orders are completed.
Questions
Common questions
What is the difference between a work order and a purchase order?
Can a work order be used for services instead of manufacturing?
Related terms
- Bill of materials A bill of materials is a comprehensive list of the raw materials, components, and instructions required to construct, manufacture, or repair a finished product.
- Sales order A sales order is an internal document generated by a seller upon receiving a purchase order, confirming the details of the goods or services to be provided to the buyer.
- Purchase order A purchase order is a legally binding document issued by a buyer to a supplier, authorising a purchase and detailing the exact items, quantities and agreed prices.
- Cost of goods sold Cost of goods sold is the total direct expense incurred to produce or purchase the items that a business successfully sells during a specific accounting period.
- Inventory turnover Inventory turnover is a financial metric that measures how many times a business has sold and replaced its total stock of goods over a specific period, usually a year.
- Backorder A backorder is a customer request for a product that is currently out of stock but is expected to be replenished and delivered at a later date.