as part of the cash conversion cycle), the more free cash flow (FCF) there tends to be since the cash is not merely sitting as inventory. Shorter WIP Stage → The quicker the inventory cycles out (i.e. Longer WIP Stage → The longer the items remain in the work in progress stage, the less efficient that company may be – all else being equal.Generally, most companies strive to reduce the amount of time that inventory spends at the work in progress (WIP) stage. be converted from raw materials into cash. Work in progress inventory can be found in the current assets section of the balance sheet, which reflects how inventory is expected to cycle out within a twelve-month period, i.e. The formula for calculating work in progress inventory – in the specific context of a manufacturer – is as follows.Ĭost of Manufactured Goods (COGM) = Manufacturing Costs + Beginning WIP Inventory – Ending WIP Inventory Inventory Management: How to Interpret WIP Inventory On the income statement, the sale of the product would be recorded in the cost of goods sold (COGS) line item. Once the product is marked as a finished good and is subsequently sold, the appropriate amount is removed inventory balance on the balance sheet. Finished Goods → The production process is complete and these items are now ready to be sold.Work In Progress (WIP) → The process of turning the raw materials into finished goods has begun, however, the item is not yet ready to be sold.Raw Materials → The materials on hand that are part of the production process, e.g. There are three stages that inventory – a current asset on the balance sheet – can be classified into: The term work in progress (WIP) describes inventory that is partially finished and currently amid the production cycle.įor instance, the WIP inventory could be undergoing finishing touches prior to being marked as complete. WIP stands for “work in progress” and refers to any partially complete inventory not yet ready to be sold to customers.Īt the WIP stage, these inventory items are not marketable and require more time before it can be sold on the market.
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