Understanding work in process inventory
Partially completed goods still moving through production. You will see it abbreviated as WIP.
Definition
Work in process inventory is the half-finished work still moving through production. On the books, this is a current asset inside inventory, often abbreviated WIP.
The costs sit on the Balance Sheet until the batch is finished. They have not yet become cost of goods sold on the profit and loss statement.
A small brewery counts beer still in the tank here. The malt is no longer in the storeroom, and the beer is not yet a keg ready to sell.
This line holds manufacturing costs that are still attached to unfinished units. It is not unused raw materials, and it is not finished goods on the shelf.
Where it shows up
Balance Sheet: Located in the current assets section, inside inventory.
P&L: Related to manufacturing costs that have not yet become cost of goods sold.
Cash flow: Increases in this account, reported cash from operating activities decreases.
See also: Inventory · Finished Goods Inventory · Manufacturing Overhead
When you look at your Balance Sheet, work in process inventory sits inside inventory, in current assets. When this account is high, a lot of cost is tied up in unfinished batches; when it is low, production may be short, or work may be moving through quickly.
The profit and loss statement does not list WIP as a line. The related manufacturing costs wait here until the goods are finished and later sold.
On the Statement of Cash Flows, paying for the inputs is the cash event. Cash from operations falls as you pay for materials, labor, and overhead, and this account rises while those costs sit in unfinished goods.
Job tickets, batch sheets, or a tank log are the documents behind the balance. They show which costs belong to which unfinished work.
How it works
A typical path starts when production begins. Raw materials leave the storeroom and enter this account.
Direct labor for the people making the product is added next. Those wages join the same unfinished units.
Manufacturing overhead is the indirect production cost applied to units made. Heat, tank depreciation, and a share of the brewery's utilities often land here too.
The three sources collect in WIP until the batch is done. Nothing on this line is cost of goods sold yet.
Some shops track each job on its own. Others use a standard cost per unit and later compare that to what they actually spent.
When the goods are finished, the accumulated cost leaves this account. It moves into finished goods inventory, still an asset, now ready to sell.
If a batch is spoiled or dumped, the cost leaves WIP another way. That loss is no longer inventory.
A rising WIP balance can mean more work on the floor, or batches that are stuck. A falling balance can mean you finished more than you started.
Example
A small brewery starts a pale ale. It issues $1,200 of malt and hops from raw materials, pays $400 of brew-day wages, and applies $200 of tank overhead.
The brewery records the materials first:
Debit: Work in process inventory $1,200
Credit: Raw materials inventory $1,200
Then it adds labor:
Debit: Work in process inventory $400
Credit: Wages payable $400
Then it applies overhead:
Debit: Work in process inventory $200
Credit: Manufacturing overhead $200
WIP now holds $1,800 of beer still in the tank. Cash may have moved for wages, but the beer is not finished.
When the ale is kegged and ready to sell, the brewery records:
Debit: Finished goods inventory $1,800
Credit: Work in process inventory $1,800
This account falls back toward zero for that batch, and finished goods rise by $1,800. The profit and loss statement still has not recorded cost of goods sold.
Common mix-ups
WIP is not raw materials. Unused malt in the storeroom has not entered this account; malt already in the tank has.
WIP is not finished goods. Beer in the tank is still being made; kegs on the rack are ready to sell.
WIP is not cost of goods sold. Manufacturing costs sit in this asset until the batch is finished and later sold.
Related terms
- Inventory: Goods held for sale or used to produce goods for sale.
- Raw Materials Inventory: Purchased materials waiting to enter production.
- Finished Goods Inventory: Completed products ready to sell to customers.
- Direct Labor: Wages for the people who directly make the product or deliver the service.
- Manufacturing Overhead: Indirect production costs applied to units made.
- Job Costing: Tracking revenue and cost for each individual job, project, or order.
- Standard Cost: A pre-set expected cost per unit used for planning and comparison.
- Inventory Valuation: The method used to assign cost to units held and units sold.