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.
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.
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).