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.