Marcus Reyes
Supply Chain & Inventory Specialist | 12 Years
Marcus has managed supply chain and inventory operations in food & beverage manufacturing for over a decade, with a focus on compliance, lot traceability, and waste reduction. He has worked with FDA-regulated manufacturers across the US.
Work-in-process (WIP) inventory is the dollar value of partially finished goods still moving through production — raw materials that have been issued to the floor, plus the direct labor and manufacturing overhead added to them so far. The formula is: Ending WIP = Beginning WIP + Total Manufacturing Costs − Cost of Goods Manufactured (COGM).
Most articles stop at the formula. This one works the whole thing through with real dollars — one month at a small candle manufacturer — because the formula only feels simple until you have to decide what counts as "manufacturing costs" and what number COGM actually is. (For the definitions of WIP and related terms, see the glossary.)
The Ending WIP Formula
Ending WIP = Beginning WIP + Total Manufacturing Costs − COGM
where Total Manufacturing Costs = Raw Materials Issued + Direct Labor + Applied Manufacturing Overhead.
Read it as a flow: value enters WIP when materials, labor, and overhead go into open batches, and value leaves WIP when a batch finishes and its accumulated cost moves to finished goods as part of COGM. Whatever hasn't left yet is your ending WIP.
Step 1: Establish Beginning WIP
Beginning WIP is simply last period's ending WIP — the accumulated cost of every production batch that was open when the period started. If you've never calculated it before, build it batch by batch: for each open batch, add up the materials issued to it plus the labor and overhead charged to it so far.
The most common error here is starting from zero because "we finished everything last month." Unless every single batch was genuinely closed at period end, you didn't — and a wrong beginning balance corrupts every month that follows.
Step 2: Add Raw Materials Issued to Production
Count only materials actually issued to production batches during the period, valued at the unit cost of the lot they came from. Two things this is not:
- Not materials purchased. A pallet of wax sitting in the storeroom is raw materials inventory, not WIP. It only enters the calculation when it's issued to a batch.
- Not materials at today's price. Each issue is valued at what that specific lot cost when you bought it — which is why your inventory valuation method (FIFO vs. average cost) feeds directly into your WIP number.
Step 3: Add Direct Labor
Direct labor is the wages of people physically making product: pouring, assembling, filling, packing on the line. Office salaries, sales commissions, and the bookkeeper's time are not direct labor — they're operating expenses and never touch WIP.
Step 4: Apply Manufacturing Overhead
Overhead is every production cost you can't trace to a specific batch: factory rent, utilities, equipment depreciation, production supervision, quality control. Because you can't invoice a batch for "its share of the electric bill," you apply overhead with a predetermined rate — most small manufacturers use a percentage of direct labor cost or a rate per direct labor hour. You can compute your own rate with Nstock's free overhead rate calculator.
Step 5: Subtract Cost of Goods Manufactured (COGM)
COGM is the total accumulated cost — materials, labor, and overhead — of every batch completed during the period and moved to finished goods. It's the exit door of WIP. If you don't track it directly, Nstock's free COGM calculator computes it from the same inputs rearranged: COGM = Beginning WIP + Total Manufacturing Costs − Ending WIP.
A Full Worked Example: One Month at a Small Candle Manufacturer
Follow one month (June) at a small candle maker. Their overhead rate is 60% of direct labor cost, set at the start of the year.
Beginning WIP (June 1): three batches were still open from May, carrying a combined accumulated cost of $8,200.
Manufacturing costs added during June:
- Raw materials issued to batches (wax, fragrance, jars, wicks): $24,500
- Direct labor on the production line: $9,800
- Manufacturing overhead applied: 60% × $9,800 = $5,880
- Total manufacturing costs = $24,500 + $9,800 + $5,880 = $40,180
Total cost in process during June = $8,200 + $40,180 = $48,380. That's every dollar that was sitting in, or flowed through, WIP this month.
COGM: during June, batches with a total accumulated cost of $41,050 were completed and moved to finished goods.
Ending WIP (June 30) = $8,200 + $40,180 − $41,050 = $7,330
Sanity check: at month end, three batches were still open on the floor, carrying accumulated costs of $3,120, $2,860, and $1,350. That's $3,120 + $2,860 + $1,350 = $7,330 — exactly matching the formula result. When the batch-level total and the formula disagree, something was posted to the wrong period or a batch was closed without being costed, and that's worth finding before the books close.
Common Mistakes When Calculating WIP
- Counting purchased materials instead of issued materials. Purchases sit in raw materials inventory until a batch consumes them. Mixing the two inflates WIP and understates raw materials.
- Using this month's overhead bills instead of applied overhead. The formula uses overhead applied at your predetermined rate; the difference between applied and actual overhead is reconciled separately, usually at year end. Swapping in actual bills mid-year makes WIP jump around with the utility calendar.
- Treating COGM as sales. COGM is what finished production this period, not what sold. A batch completed in June that sells in August is in June's COGM and August's cost of goods sold — see COGS explained for that next step in the chain.
- Letting stalled batches hide in the number. A stable-looking ending WIP can conceal one batch that's been open for months. Review open batches by age, not just the total — a climbing WIP balance with flat output usually means batches are opening faster than they close.
Frequently Asked Questions
Is WIP inventory an asset?
Yes — work-in-process inventory is a current asset on the balance sheet, sitting between raw materials and finished goods. The materials, labor, and overhead in open production batches are real invested value, even though the product isn't sellable yet.
What's the difference between WIP and finished goods?
WIP is product still in production — materials issued to open batches plus the labor and overhead added so far. Finished goods are completed products ready to sell. Value moves from WIP to finished goods at the moment a production batch is completed, and the amount that moves during a period is the cost of goods manufactured (COGM).
Does WIP include labor and overhead or just materials?
The full accounting definition of WIP includes direct materials, direct labor, and applied manufacturing overhead. Some inventory systems report a materials-only WIP figure — Nstock's WIP Valuation report, for example, tracks the materials cost consumed into open batches — so check what your system includes before comparing its number to a books figure that absorbs labor and overhead.
How do I reduce WIP inventory?
Close batches faster: the WIP balance is driven by how many batches are open and how long they stay open. Practical levers are smaller batch sizes, clearing the bottleneck station that stalls half-finished work, and not issuing materials to a batch until production is genuinely ready to start — issuing early just moves value into WIP sooner without making anything finish faster.