Definition: Work in process inventory is materials that are in the process of being produced or manufactured into finished goods to be sold to customers. Manufacturers and other businesses that produce products are the only types of businesses that use the work in process inventory account.
What Does WIP Inventory Mean?
Unlike retailers, manufacturers typically categorize their inventory into three different types of accounts: raw materials, work in process, and finished goods.
Example
Raw materials inventory is the raw stock manufacturers order to produce their products.
Once the manufacturer starts the machining and production process, these raw materials can’t really be considered raw anymore. Now they a small amount of work done on to them, but they are not completely finished and ready to be sold. That is why materials that are in the production process but not fully finished are called work in process inventory.
After the work in process inventory has completely been manufactured, it can be sold to a customer as a finished good and is no longer considered a work in process.
This inventory cycle repeats itself over and over during the year for manufacturers. Raw materials are converted to work in process inventory and then converted to finished goods.
An important note to consider is that work in process inventory can vary greatly. In other words, not all work in process inventory is the same. Some inventory might have one stage of machining done and other inventory might have all but one stage of machining done. Any materials during the manufacturing process are considered work in process inventory. It doesn’t matter what stage they are currently in.
