work in process
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Financial Definition of WORK IN PROCESS
What It Is
Work-in-process (WIP) refers to a component of a company's inventory that is partially completed. The value of that partially completed inventory is sometimes also called goods in process on the balance sheet (particularly if the company is manufacturing tangible items rather than providing services).
The formula for WIP is:
Work in process = (operating inventory goods in process + raw materials used during the period + direct labor during the period + factory overhead for period) - ending inventory
How It Works
For example, let's assume Company XYZ manufactures widgets. It takes two weeks to make a widget. On the last day of the month, when Company XYZ "closes the books," the company counts its inventory and sees that it has 10,000 widgets. It also has 4,000 partially completed widgets. These 4,000 partially completed widgets are recorded as work in process on the left-hand side of the balance sheet (that is, they are recorded as assets).
Why It Matters
For obvious reasons, work in process is not worth as much as completed goods, but they are worth more than raw materials because they have incurred some labor and overhead.
Changes in the amounts of work in process can be telling. For instance, an increase suggests an uptick in demand for a company's goods (which is almost always a good thing for the company's shareholders, though it may also signal that the company will need capital soon to cope with the growth). In turn, widespread increases in work in process for an industry or entire economic sector may indicate economic growth; likewise, decreases may indicate a pending slowdown.
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