What is WIP Inventory? Definition & Manufacturing Examples

What is WIP Inventory?

Work in process inventory, usually shortened to WIP, is everything that has started manufacturing but is not finished. It covers raw material issued from the stockroom, parts waiting between operations, items being machined or assembled right now, and product waiting on inspection before the next step. WIP is the manufacturing pipeline: everything between raw material receipt and a finished good you can sell.

It is also the most expensive inventory a plant holds per unit. Material cost plus the labor and overhead already applied are sunk into it, and none of it can be invoiced until the last operation closes.

Work in Process or Work in Progress?

Both forms are in use and they refer to the same inventory. Manufacturing and cost accounting generally say work in process, because the material is moving through a defined process with named operations. Construction, professional services and general financial reporting lean toward work in progress. WIP is the abbreviation either way, and no accounting standard forces the choice. If a search brought you here on one spelling, this entry covers the other.

How WIP Inventory Works

WIP inventory accumulates whenever work is released to the shop floor faster than it can be completed. Every job that leaves the stockroom adds to WIP, and every job that passes final inspection and moves to finished goods reduces it. The balance at any moment reflects both the volume of work in progress and the speed at which it flows through the factory.

On the balance sheet, WIP is valued at the cost of raw materials consumed plus direct labor and overhead applied to date. As a job moves through successive operations, its WIP value increases because more labor and machine time have been invested. This makes WIP the most expensive form of inventory per unit - more costly than raw materials but not yet saleable like finished goods.

High WIP levels are a symptom of scheduling and flow problems. Common causes include large batch sizes, long setup times, unbalanced workstation capacities, excessive rework, and push-based scheduling that releases jobs against forecasts rather than actual downstream demand.

The Work in Process Inventory Formula

There are two formulas, and they answer different questions. Accounting wants the balance; operations wants the lead time.

The accounting form closes the WIP account for a period:

Ending WIP = beginning WIP + manufacturing costs added - cost of goods manufactured

The operational form is Little's Law, and it is the one that changes decisions:

Lead time = WIP / throughput

Rearranged, WIP = throughput x lead time. Hold throughput steady and lead time moves in direct proportion to WIP, which is the whole reason lean manufacturing attacks WIP first. You cannot halve lead time while keeping the same pile of work in the system; the arithmetic does not allow it.

Work in Process Inventory Example, Computed

A precision machining shop completes 60 jobs per week through five operations: sawing, turning, milling, grinding and inspection. On a five-day week that is a throughput of 12 jobs per day. Each operation takes about a day, so under perfect flow a job spends five days in process.

Apply Little's Law to all three states of this shop.

Before the changes the shop released jobs in weekly batches and grinding was the bottleneck, so WIP averaged 140 jobs and lead time ran at 11.7 days. Nothing about the machining was slow. Nearly seven of those days were queue.

The fix was release discipline, not equipment: finite capacity scheduling, grinding batches cut from 20 to 5, and job releases staggered daily instead of dumped weekly. WIP fell to 80 jobs and lead time to 6.7 days, a 43 percent reduction, at exactly the same throughput.

Now the accounting side, for the transition week, at an average WIP value of $350 per job and a full accumulated cost of $700 for a completed job.

Ending WIP of $28,000 at $350 a job is 80 jobs, which matches the operational count, and the $21,000 difference is working capital handed back to the business.

The one number worth staring at is the costs added line. For that week the shop deliberately put less cost into the floor than it took out, and that is the only mechanism by which a WIP balance ever falls. Every WIP reduction programme that skips this step fails, because it tries to drain the tank without turning down the tap.

Why WIP Inventory Matters for Production Scheduling

WIP is the bridge between the production schedule and shop floor reality. Scheduling software like Resource Manager DB (RMDB) and its successor EDGEBIC (RMDB 2.0) tracks job status at each operation, giving real-time visibility into WIP by work center. When WIP exceeds target, the system shows planners to hold new releases or resequence jobs rather than discovering the overload a week later.

Finite capacity scheduling controls WIP by construction, because it does not release work until a downstream resource has the hours to run it. That is what matching job releases to the hours each resource actually has does to a queue: it stops it forming. A lower queue also makes the floor legible, since an operator can read 10 jobs of priority and cannot read 50. For the full method see our guides on cutting work in process through release control and the cash that comes back when the queue shrinks.

Where the release decision has to account for labor and tooling as well as machines, planners hold the whole resource picture in one schedule instead of controlling machine load and discovering the labor shortfall afterwards. GE Railcar Services went from 30 percent to over 90 percent on-time shipping on that footing, and Homestead Furniture moved its basic weekly schedule from a 40-hour scheduler task to a 2-hour clerk task.

Related Terms

• Throughput - The rate at which WIP converts to finished goods
• Cycle Time - The time to complete one unit through an operation, a key driver of WIP levels
• Kanban - A pull system that limits WIP by controlling the number of active jobs

Common Questions About Work in Process Inventory

Why is high WIP inventory a problem?

Excess WIP ties up working capital, stretches lead time in direct proportion through Little's Law, fills floor space, raises the risk of damage and obsolescence, and buries real priorities under a queue nobody can read. It is also the most expensive inventory per unit, because labor and overhead have already been spent on it and it still cannot be invoiced.

How do you reduce WIP inventory?

Release less work to the floor than the floor finishes, until the balance comes down, which is the step most programmes skip. Then keep it down: shorten setup times, cut batch sizes, level the schedule, relieve the bottleneck, and schedule against real capacity so no job is released before a resource exists to run it. The example above did exactly this and took 43 percent out of lead time without touching throughput.

Where does WIP inventory appear on the balance sheet?

As a current asset, between raw materials and finished goods, valued at the material consumed plus the direct labor and manufacturing overhead applied to date. Its value rises with every operation a job completes, which is why a long queue late in a routing is far more expensive than the same queue at the saw.

Learn more in our complete manufacturing glossary or production scheduling guide.