What Is Work in Progress (WIP)? Meaning in Accounting

Search Fintrev

Search our guides, reviews and glossary.

Work in progress (WIP) is the cost of goods that a company has started making but has not yet finished. In accounting, WIP is a category of inventory: it holds the raw materials, direct labor and manufacturing overhead already put into partially completed products. It is reported as a current asset on the balance sheet until the goods are completed, at which point the cost moves to finished goods and, once sold, to cost of goods sold.

WIP stands for “work in progress.” Accountants and manufacturers also call it work in process, in-process inventory or goods in process.

What WIP Includes and Excludes

The WIP balance covers only products sitting at an intermediate stage of production. Three kinds of cost build it up:

• Direct materials that have been issued to production and incorporated into the unfinished product.
• Direct labor for the work already performed on those units.
• Manufacturing overhead allocated to the units, such as factory utilities, equipment depreciation and supervision. Companies commonly allocate overhead on a base such as labor hours or machine hours.

WIP excludes raw materials still in the storeroom, which stay in the raw materials account, and completed products held for sale, which belong in finished goods. Selling and administrative expenses are period costs and never enter WIP.

An item becomes WIP once labor is applied to raw material but before all the necessary work is done. A sheet of plastic in a warehouse is raw material. The same plastic in a mold, with machine time and operator wages added, is WIP. A packaged comb ready to ship is a finished good.

How Costs Flow Through WIP

WIP works as a holding account that collects production costs while goods are being made. The flow follows a fixed sequence:

1. Raw materials are moved into production.
2. Labor and overhead are applied to the units in process.
3. Completed units are transferred to finished goods inventory.
4. When units are sold, their cost leaves inventory and is recognized as cost of goods sold (COGS).

Journal Entries

Under a perpetual system, the typical entries look like this:

Moving raw materials into WIP is an asset-to-asset transfer, not an expense. The cost stays on the balance sheet until the product is sold.

How to Calculate WIP

The standard formula for ending work in progress is:

Ending WIP = Beginning WIP + Manufacturing costs − Cost of goods manufactured

Manufacturing costs are direct materials used, direct labor and overhead applied during the period. Cost of goods manufactured (COGM) is the cost of units completed and transferred to finished goods during the same period.

Worked Example (Hypothetical)

A hypothetical furniture maker reports the following for one quarter:

• Beginning WIP: $20,000
• Direct materials used: $50,000
• Direct labor: $30,000
• Manufacturing overhead applied: $25,000
• Cost of goods manufactured: $110,000

Total manufacturing costs added are $105,000. Adding beginning WIP gives $125,000 of cost that was in production at some point during the quarter. Subtracting the $110,000 of completed goods leaves ending WIP of $15,000, which appears on the quarter-end balance sheet as inventory.

Percentage of Completion and Equivalent Units

Valuing the unfinished units means estimating the share of total material, labor and overhead cost each has already absorbed. Materials are typically added first, since labor cannot begin until they are in place, so a unit can be fully complete for materials while only partly complete for conversion costs (labor plus overhead).

Process manufacturers express this through equivalent units. For example, suppose 1,000 units remain in process at period end, 100% complete for materials and 40% complete for conversion. They count as 1,000 equivalent units of materials and 400 equivalent units of conversion. If materials cost $8 per equivalent unit and conversion costs $5, ending WIP is (1,000 × $8) + (400 × $5) = $10,000.

Job Costing vs. Process Costing

The way WIP is tracked depends on how a company produces.

Job costing is used when each order is different. Every job gets its own cost record listing materials, labor hours and overhead, and the WIP balance is the sum of open jobs. A roofing contractor bidding on houses of different sizes, each needing its own materials and labor hours, is a typical job-costing business.

Process costing is used for large volumes of identical products. Costs accumulate by department rather than by order. A comb manufacturer might run plastic through molding, then painting, then packaging, with each department adding cost and passing units along to the next. WIP is measured department by department using equivalent units.

Why WIP Matters

For management, WIP shows how much money is tied up on the factory floor. Goods in process cannot be sold, yet they have already consumed cash for materials and wages. A rising WIP balance can point to bottlenecks, longer production cycles or slowing completions, and it affects working capital and free cash flow.

Many manufacturers try to keep WIP low, especially going into a reporting date. Estimating completion percentages is time-consuming and subjective, and smaller balances reduce storage needs and the risk that partially built goods become obsolete.

For investors and analysts, WIP feeds into total inventory, current assets, inventory turnover and liquidity ratios. Many companies disclose raw materials, WIP and finished goods separately in the inventory note; some present a single inventory line.

Can WIP Appear in the Profit and Loss Account?

Closing WIP is an asset, so its balance belongs on the balance sheet, not in the profit and loss account. It affects profit only through cost of sales. In a cost of goods manufactured schedule, beginning WIP is added and ending WIP is subtracted, so a larger closing WIP means less cost transferred to finished goods and ultimately to COGS for the period.

Some presentations make this visible on the income statement. Companies that classify expenses by nature, a format permitted under IFRS and common in the UK and Europe, show a line for “changes in inventories of finished goods and work in progress.” That line is the movement in the balance, not the closing stock itself.

Work in Progress vs. Related Terms

Work in Progress vs. Work in Process

In most usage, the two terms are interchangeable. Some reserve work in process for manufactured goods with short production cycles and work in progress for longer efforts such as construction or consulting projects, but this split is a convention, not an accounting rule.

WIP vs. Finished Goods

The difference is stage of completion, which in practice means saleability: WIP is still being developed or assembled, while finished goods are ready for sale to a customer. Classification depends on the company: a lumber mill treats plywood as a finished good, while a cabinet maker that buys that plywood records it as raw material.

Inventory WIP vs. Capital Work in Progress

Capital work in progress, often called construction in progress, is different. It is the cost of long-term assets a company is building for its own use, such as a new plant. It sits within property, plant and equipment as a noncurrent asset, and it is not depreciated until the asset is placed in service. Inventory WIP, by contrast, is made to be sold.

WIP in Projects and Services

Construction firms, law firms and consultancies also track WIP: costs or unbilled work on contracts not yet finished, often billed at milestones such as 25% or 50% completion. Under current revenue standards, revenue on many long-term contracts is recognized over time based on progress, so unbilled work can sit as a contract asset.

Limitations

• Estimation risk. Completion percentages are judgments. Overstating them inflates inventory and understates cost of sales, which raises reported profit.
• Overhead allocation. Using labor hours versus machine hours, or different capacity assumptions, changes how much cost lands in WIP.
• Inventory method. FIFO, weighted average and, in the US, LIFO produce different WIP values from the same physical units.
• Comparability. Because of these choices, WIP balances across companies, or across industries with different production cycles, cannot be compared at face value.
• Valuation write-downs. If expected selling prices fall, WIP may need to be written down, so the recorded cost is not a guarantee of recoverable value.

The Bottom Line

WIP matters to managers tracking cash tied up on the factory floor and to investors reading inventory, current assets and turnover ratios. Its balance stays on the balance sheet and reaches profit only through cost of goods sold. Because completion estimates, overhead allocation and inventory methods vary, readers should treat WIP figures as judgments and avoid comparing them across companies at face value.