Work in process inventory: a detailed Guide

The flow of content:

Once the manufacturer gets the raw materials in-house, the process for making the finished products begin. Thus, the inventory which is in the process of turning into finished products from the raw materials is called work in process inventory. 

However, let’s look at some popular definitions of the term

Definition:

According to Wikipedia,

“Work-in-process is a company's partially finished goods waiting for completion and eventual sale or the value of these items. The term is used in production and supply chain management.”

As per the Merriam-Webster dictionary, 

“Work-in-process (WIP) refers to a component of a company's inventory that is partially completed. The value of that partially completed inventory is sometimes also called goods in process on the balance sheet (particularly if the company is manufacturing tangible items rather than providing services).”

WIP inventory includes all costs incurred during the production process before a product is fully assembled and ready for sale. These costs can include:

• Raw materials costs
• Labor costs
• Overhead costs (e.g., utilities, factory rent, equipment maintenance)

Work in process formula

It is essential for any manufacturing company to know the exact amount of inventory they hold whether it is in terms of raw materials or work in process inventory. Inventory management helps in counting and maintaining all kinds of inventory.  The accurate number of inventory by regularly counting the stock will give the manufacturer a fair idea of how much needs to be produced and also help in forecasting the production as per the demand.

Accounting for Work in Process Inventory

Beyond its role in production, WIP inventory is also a key financial metric, classified as a current asset on a company's balance sheet.

WIP inventory includes:

• Raw materials – Cost of materials used in production but not yet finished.
• Labor costs – Wages paid to employees working on production.
• Overhead expenses – Utilities, factory rent, equipment maintenance, etc.

Why does this matter?

• Helps companies understand how much capital is tied up in production.
• Ensures accurate financial reporting and better budgeting.
• Prevents unexpected cash flow problems caused by mismanaged inventory.

Apart from this, calculating work in process expenses is one of the important tasks for financial management. While recording the inventory in the financial balance sheet, work in process inventory is mentioned as assets.

Now for calculating this one must refer to the balance sheet of the previous quarter, month or year to get the required details. 

To calculate the work in process inventory, you need to use the following formula:

Beginning work in process amount + manufacturing costs - cost of manufactured goods

For instance, let us assume a company called Crown Industries who is into manufacturing furniture.

As per the previous year’s balance sheet, Crown industries have $8000 worth of beginning work in process inventory and they incur $ 240,000 as manufacturing costs and their total worth of finished goods is 238000 

Therefore,  as per the formula, 

8000+ 240000 - 238000 = 10000 

This means that Crown Industries has $10000 work in process inventory with them. 

However, by using this formula, you can get only an estimate of the work in process inventory. For the exact number of work in process inventory, you need to calculate it manually.

Manual vs. Automated WIP Inventory Tracking

While formulas provide an estimate of WIP inventory, manufacturers should manually track inventory to ensure precision in financial reporting and cost management.

Manual Inventory Tracking Helps Identify:

• Spoilage and material waste
• Production delays affecting inventory flow
• Scrap losses and defective goods

Example: A textile manufacturer finds that $2,000 worth of fabric was damaged during production. If this isn’t recorded in WIP calculations, the company’s financial reports may be inaccurate.

One of the advantages of calculating it manually will be you can add expenses like the cost of scrap, spoilage of raw material, etc. as well in it since it is all visible during physical counting.

Why Automating WIP Inventory Management is Beneficial

For better accuracy and efficiency, manufacturers are increasingly using automated inventory management systems.

Real-time inventory tracking prevents errors in financial reports.
AI-powered demand forecasting helps optimize WIP stock levels.
Integration with accounting software ensures accurate reporting on the balance sheet.

Example: A car manufacturing company automates WIP tracking, reducing errors and improving production efficiency by 15%.

Difference between work in process and work in progress

Though both these terms are used interchangeably, their meaning differs in the business terminology. Here are some of the major differences between work in process and work in progress: 

• Work in process is generally used by companies into manufacturing products since the products that are in process and not yet transformed into finished goods can be counted or recorded in the books of accounts.Whereas, Work in progress is a term used mainly in the construction business when a certain building is being constructed.

• Work in process is generally used for unfinished products that will be turned into finished products soon. For example, a bakery having 50 batches of bread under production is work in process or a tailor sewing suits has 5 suits that are cut but they have not yet been sewed then all the 5 suits will be counted as work in process.Whereas, Work in progress takes a long time to convert into a finished product. For example, a building whose 3 floors are constructed out of a planned 25 floors building is a work in progress.
• Work in process is a term used to describe products per se.Whereas work in progress can be used for services, work assignments, home renovation, and relationships as well. Thus, has a broader meaning than the former term.