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Work in Process (WIP) Inventory

What is work in process (WIP) inventory?

Work in process and work in progress (WIP)  are inventory management terms that refer to partially-completed goods within any production round. When used in supply chain management, work in process is associated with the total cost of unfinished goods that are currently in production. Businesses who sell highly-customized products are more likely to have WIP inventory than businesses who purchase final products from a supplier. With that said, work in progress inventory is considered a significant asset to a company's balance sheet. 

Work in process (WIP) inventory formula

For the majority of manufacturers, work in process inventory is calculated as the raw materials plus labor and production overhead. But for more complex operations — like construction projects — WIP will often include wages, subcontractor costs, and more. 

Once you’ve determined your beginning WIP inventory and calculated your manufacturing costs (as well as your cost of manufactured goods), it’ll be easier to estimate how much WIP inventory you actually have on hand. The formula for calculating WIP inventory is: ending WIP inventory = [beginning WIP inventory + manufacturing costs] – COGM. In this formula, COGM = cost of goods manufactured.

Calculating WIP inventory: an example

Pretend you own a hat brand, and your store has a beginning WIP of $50,000. In the last year, you spent $75,000 on manufacturing costs, but your manufacturer produced 1,000 hats (each costing an average of $20 to make). In this scenario, your cost of goods manufactured is: $20 x 1,000 = $20,000. With this information, you can now calculate your ending WIP inventory. Here, that looks like: $50,000 + $75,000 – $20,000 = $105,000 (your ending WIP inventory).

Frequently Asked Questions

  • Why is work in process inventory important?

    Knowing how to properly calculate your work in process inventory can impact your balance sheet in a big way. If your company specializes in customized items, it’s especially important to understand how WIP inventory works, what goes into the cost, and how to calculate it at the end of the accounting period. Doing so will give you a better sense of your cost of goods sold, based on how much you paid to produce and manufacture your finished products.

  • What is considered work in process?

    Typically, WIP is used in reference to the raw materials, direct labor costs, and factory overhead costs that are incurred for products at various stages of the production cycle. Work in process is a part of the inventory asset account on your balance sheet; these expenses are subsequently transferred to the finished goods account (and eventually to the cost of sales).

    Keep in mind, the WIP figure is only a reflection of the value of certain goods in an intermediate phase of the production process. This excludes the valuation of raw materials not yet incorporated into an item for sale, and similarly excludes the valuation of finished products that are held in anticipation of future sales.

  • How do I account for work in process inventory?

    When it comes to accounting for work in process inventory, WIP is considered a current asset, and is therefore combined with the inventory line item on the balance sheet. The work in process category is usually the smallest of the three most common inventory accounts, which also includes raw materials inventory and finished goods inventory.

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