Accounting Dictionary

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Work-in-Process Inventory

Definition: Work-in-process inventory is inventory that has been partially converted through the production process, but for which additional work must be completed before it can be recorded as finished goods inventory.

The cost of work-in-process inventory typically includes all of the raw material cost related to the final product, since raw materials are usually added at the beginning of the conversion process. Also, a portion of the direct labor cost and factory overhead will also be assigned to work-in-process; more of these costs will be added as part of the remaining manufacturing process.

It is time-consuming to calculate the amount of work-in-process inventory, determine the percentage of completion, and assign a cost to it, so it is standard practice in many companies to minimize the amount of work-in-process inventory just prior to the end of an accounting period.

Work-in-process is an asset, and so is aggregated into the inventory line item on the balance sheet.

It is generally considered a manufacturing best practice to minimize the amount of work-in-process in the production area, since too much of it interferes with the process flow. Also, if work-in-process is allowed to pile up at one work center before being shifted to the next one, this means that a series of flawed units could build up before being discovered at the next work center. Ideally, work-in-process should move between work centers one unit at a time.

Related Terms

Work-in-process inventory is also called work-in-progress inventory or WIP inventory.