Shopify blog
Work-in-process (WIP) inventory is the value of unfinished goods moving through production.
When manufacturers tally finished products, they account for items in the pipeline—a capital investment they’re looking to convert into cash. US manufacturers held $270.6 billion in WIP inventory in March 2026, the US Census Bureau estimates.
This guide covers how work-in-process inventory works and how manufacturers manage capital tied up in unfinished goods.
What is work-in-process inventory (WIP)?
Work-in-process inventory (WIP) describes goods entering production that aren’t yet finished. It captures partial costs during specific periods. Manufacturers use WIP to value inventory and track production costs.
Work-in-process inventory includes:
- Raw materials entering production
- Direct labor for workers’ tasks
- Factory overhead for unfinished products
WIP inventory occurs when goods undergo processing before manufacturers sell or use them. For example, a clothing manufacturer cuts fabric, stitches pieces, adds fasteners, and attaches labels. If they have a half-completed shirt at the end of a quarter, they record it as WIP inventory.
Manufacturers list WIP on the balance sheet as a current asset. They expect these products to generate revenue once workers finish and sell them.
Why WIP is important
Tracking WIP inventory helps manufacturers understand what’s currently in production and what still needs to be completed. The benefits include:
Efficiency
Accurate work-in-process (WIP) recording helps businesses use resources better, find production bottlenecks, and manage costs.
The inventory data shows managers where materials are in the production process. It lets them spot slowdowns before unfinished goods tie up labor, machine time, storage space, and cash.
The American Productivity & Quality Center (APQC) categorizes WIP inventory days of supply as a process efficiency measure. It reports a median of 23.9 days across 2,659 companies. This metric shows how WIP links to efficiency: Materials that don’t move keep resources tied up longer.
Cash flow
Work-in-process (WIP) inventory is cash tied up in goods that aren’t ready for sale. Cash flow pressure grows when production inputs get more expensive.
In the National Association of Manufacturers (NAM) Q4 2025 Manufacturers’ Outlook Survey, 80% of manufacturers expected raw material prices to increase over the next year. More than one-third expected increases above 5%.
WIP includes the cost of materials, labor, and manufacturing overhead used in production. Higher input costs leave more cash locked in partially completed goods before they’re recovered through sales.
Manufacturers can access short-term inventory financing to address cash flow issues. This includes WIP financing, where they use WIP as collateral for a loan.
Financial reporting
Work-in-process (WIP) inventory accounting appears on a brand’s balance sheet to track financial health. Overstated WIP inflates current assets, while understated WIP misrepresents production progress. Both issues can give stakeholders a misleading view of operational health
For example, Micron reported that a 5% decrease in future average selling prices would have changed the estimated net realizable value of its finished goods and work-in-process inventories by approximately $750 million as of August 28, 2025.
Lower expected selling prices can force a company to reduce the reported value of WIP, increasing cost of goods sold (COGS) and lowering gross profit.
Raw materials vs. WIP inventory vs. finished goods
Manufacturing inventory management tracks three stages:
- Raw materials. Manufacturers haven’t moved these basic ingredients into production yet. These include bolts of fabric for clothing or metal for electronic circuits and wires.
- Work in process. Also called WIP, this stage covers materials currently in production. This includes goods factory workers handle or machinery fabricates as they await completion.
- Finished goods. These products have moved through the manufacturing process and are ready for sale. They often go from the production line to warehouses and distribution centers before shipping to sellers.
How to calculate WIP inventory
Companies that manufacture their own products, or collaborate with contract manufacturers, calculate WIP inventory using their three-part formula:
(Beginning WIP Inventory + Production Costs) - Finished Goods = Ending WIP Inventory
The inventory formula tracks the flow of production costs. It starts with beginning WIP inventory, adds production costs incurred during the period, and subtracts the value of goods that moved into finished inventory.
1. Beginning WIP
This inventory carries over from the previous period’s ending balance. It’s the baseline for measuring production and inventory changes.
2. Total production costs
Spending on raw materials, labor, and overhead affects the value of inventory in production. These costs help managers price products, set budgets, and improve manufacturing. They are sometimes referred to as manufacturing costs.
3. Cost of finished goods
Also called cost of goods manufactured (COGM), cost of finished goods helps managers assess how efficiently resources are being used in the manufacturing process. COGM includes all costs from the beginning inventory levels up to the final finished goods.
Work-in-process inventory examples
WIP inventory example #1
A personal-care products maker has $50,000 of WIP inventory—partially completed creams and lotions—at the end of the fourth quarter. It carries that over to the first quarter as beginning WIP. Its total production costs in the first quarter are $250,000, and the cost of goods manufactured is $270,000.
The calculation for the end of the first quarter is:
($50,000 + $250,000) - $270,000 = $30,000
The maker reduced its WIP inventory from $50,000 to $30,000. It carries this amount over to the second quarter as beginning WIP and repeats the calculation.
Lower WIP suggests a manufacturer uses materials and labor efficiently. An increase in WIP can indicate production bottlenecks that lead to higher storage costs for unfinished goods.
WIP inventory example #2
A furniture manufacturer is building 200 custom dining tables for a retailer. At the end of the month, 120 tables are fully assembled but still need sanding, staining, and final inspection before they can be sold.
Those unfinished tables count as WIP inventory because the company has already used raw materials, labor, and overhead to make them, but they’re not finished goods yet. The wood, hardware, and assembly labor tied up in those 120 tables stay in WIP until the tables are completed and moved into finished goods inventory.
Tips for optimizing your WIP inventory
Efficiently managing WIP inventory means striking the right balance between running too lean while avoiding excess. The following tips can help:
Get leaner
Practice lean manufacturing, meaning reducing waste and boosting productivity.
Use just-in-time (JIT) production and lean inventory management to get the most from your materials and labor and keep waste to a minimum. Manufacture only the quantity that’s needed to minimize WIP inventory and related costs for storage and maintenance of unfinished goods.
Set a timetable
Create a production schedule to move inventory through every stage. Match customer demand with available resources to prevent bottlenecks and overproduction.
Automate
Small businesses with simple operations track production and inventory with an Excel spreadsheet. Larger manufacturers use inventory management software to monitor production flow and costs in real time. They maintain more accurate WIP inventory records this way.
Supply chain leaders in 2026 manage complexity, compliance pressure, and visibility demands. Accurate production and inventory tracking help them meet these requirements.
Common tracking methods include:
- Manufacturing execution systems (MES). These systems track production activity on the factory floor, including work orders, machine status, labor inputs, and WIP movement.
- Job costing systems. These assign material, labor, and overhead costs to specific production jobs so manufacturers see the true cost of each order.
- Cloud-based inventory software. This technology centralizes inventory data across locations and updates records in real time as materials move through production.
- Barcodes, QR codes, and radio-frequency identification (RFID). These tools label goods and materials so employees scan items as they move through receiving, production, storage, and fulfillment.
Integrate these systems with other software you’re using.
Set limits for WIP
Minimum and maximum WIP limits help prevent overproduction and underproduction.
A WIP minimum provides enough inventory to keep production moving. Workforce size and equipment capacity determine the maximum. Manufacturers use a historical average, like the average monthly WIP value for the past 12 months, to set these limits.
Collaborate
Manufacturers can collaborate with ecommerce businesses that use them for contract production. They keep ecommerce companies informed about their production processes, schedules, and costs and help retailers set product prices.
Outsource
Consider using inventory management services when your manufacturing business grows enough to need outside help. Specialized providers of inventory and warehouse management, called third-party logistics (3PL), can free up a business to focus on growth in new markets and add customers.
In a 2025 GXO survey, 58% of respondents said the biggest benefit of outsourcing logistics was the ability to focus on their core business, while 43% cited improved efficiency and productivity.
Work-in-process inventory FAQ
What is the difference between work-in-process and work-in-progress inventory?
Work in process and work in progress are sometimes used interchangeably when referring to inventory. But typically, work in process refers to the manufacturing of uniform products in a relatively short period, such as apparel or consumer electronics. Work in progress is used in industries where each product is unique, such as a building, and time to completion is longer—weeks, months, even years.
How does optimizing WIP inventory benefit an ecommerce business?
Optimizing WIP helps avoid overproduction and controls the costs of inventory storage, as well as reduce the risk of products in inventory becoming lost, stolen, or falling out of favor with customers. Optimizing also helps ecommerce businesses maintain the right amount of inventory to avoid underproduction and out-of-stock situations, potentially leading to lost sales and customers.
What is an example of work in process?
An example of work in process would be a maker of wooden patio furniture. Its raw materials are lumber, metal joiners and fasteners, plastic washers, stain, and varnish. Work in process would be lumber cut into table legs and tops, but not yet assembled or varnished.
What does work-in-process inventory include?
Costs of raw materials, labor, and overhead for unfinished products are included in work-in-process inventory.
How does work-in-process inventory affect inventory valuation?
Work-in-process (WIP) inventory is a current asset on the balance sheet and is the cumulative cost of raw materials, direct labor, and manufacturing overhead in unfinished goods. Accurate WIP values mean you don’t understate total inventory assets or overstate COGS.
