Work in Process Inventory Formula, for Batch Makers

Work in process (WIP) inventory is everything you've started making but haven't finished: dough proofing overnight, poi fermenting in tubs, vanilla extract aging in jars, soap curing on racks. The formula is: ending WIP = beginning WIP + manufacturing costs added this period − cost of goods manufactured (what was finished). You value WIP at the cost put into it so far, never at what it'll sell for. For a maker who finishes every batch the same day, WIP at month end is zero and can be ignored; for anyone whose process takes days or months, it's real money on the balance sheet. Below are the formulas, a month worked through, how to value half-made stock, and how to keep it visible.

The short version

• WIP: started, not finished. Valued at cost so far.
• Ending WIP = beginning WIP + manufacturing costs − cost of goods manufactured.
• Manufacturing costs = raw materials used + direct labor + overhead.
• Cost of goods manufactured = what was finished and moved to finished goods.
• Same-day batches mean no WIP; aging, fermenting and curing mean real WIP.
• Value it at cost incurred, not at selling price.
• TaroStack can keep the in-process stage as its own item, at cost, in stock value. More below.

The formulas

Manufacturing costs         = raw materials used + direct labor + overhead
Cost of goods manufactured  = beginning WIP + manufacturing costs − ending WIP
Ending WIP                  = beginning WIP + manufacturing costs − cost of goods manufactured

They're the same equation turned around. In practice, you count and value what's in progress at month end (the ending WIP), and the formula gives you cost of goods manufactured, which flows into finished goods as in finished goods inventory formula.

Where WIP shows up in small businesses

Valuing what's half made

WIP is valued at what you've put in so far: the ingredients already used and the labor already spent, plus overhead if your accountant applies it. Not at the selling price, and not at the full cost of the finished product, because the bottles, labels and finishing labor haven't been spent yet.

Windward Roots, the made-up taro business I use in these examples, has two processes running at the end of December:

The vanilla's bottles, labels and bottling labor aren't in it, because they haven't happened yet. The vanilla figures come from how to price homemade vanilla extract.

A month, worked through

Beginning WIP, Nov 30                $2,410.00
+ Raw materials used in December     $6,200.00
+ Direct labor                       $2,300.00
+ Overhead                             $700.00
− Ending WIP, Dec 31                 $2,856.00
= Cost of goods manufactured         $8,754.00

The $8,754 is what moved into finished goods in December: bags of chips, loaves, bottled extract and tubs of poi that were finished. WIP grew by $446 during the month ($2,856 − $2,410), which is cash that went into product that isn't sellable yet. If you ignored WIP, December's cost of goods manufactured would be overstated by that $446, and so, eventually, would cost of goods sold for the month. How that flows into the books is in cost of goods sold journal entry.

Keeping WIP honest

For anything that takes months, WIP is also capacity: jars, racks and tanks full of product in process limit what you can start. How to measure that is in how to calculate production capacity.

Where this stops working

On paper, WIP is the line that gets skipped. Nobody prices the jars at month end, the soap on the rack is counted as finished, or as nothing, and the formula never gets used, so the month's cost of goods manufactured jumps around for reasons nobody can explain. When a batch fails in the tank, it quietly disappears without a write-off.

How TaroStack does it

TaroStack doesn't keep a separate WIP account, but it lets you give the in-process stage its own place in stock, at its real cost, so it's never invisible.

The in-process stage can be its own item. Recipes contain other recipes, so a long process can be two steps: a batch that makes "vanilla extract, aging" (a component) from beans and vodka when you start, and a batch that turns it into bottles when it's ready. The aging extract then sits in stock as its own line, with its lot, dates and cost, and stock value, split by type, shows components apart from raw materials and finished goods. Held stock sits apart from what's available to sell, so nothing is shipped early.

Its cost is what went in. Each batch takes ingredients from the lots used, at what you paid, with freight spread across each delivery, and notes them in the batch record. So the in-process value is the actual cost so far, and the bottling step adds the bottles and labels when they're used.

And failures are recorded. If a tank spoils, writing it off records the reason (spoiled, damaged), so it lands in the losses report with its cost instead of vanishing. Production orders carry each batch from plan to record, so what's in progress is on a list, not on tape on a jar.

Stock value, lots and the losses report are on every plan, from $49 a month; recipes, batches and production orders are on Standard at $99. The first 30 days are free, with no credit card. If you'd like a hand setting up, ask, and we'll do it with you.

Questions people also ask

How do you calculate work in process inventory?

Ending WIP = beginning WIP + manufacturing costs (materials used, labor, overhead) − cost of goods manufactured. In practice, count and value what's in progress at month end at the cost put into it so far.

How is work in process valued?

At the cost incurred so far: ingredients used, labor spent and any applied overhead. Not at selling price, and not including costs still to come, like bottles and labels.

Does a small bakery have work in process?

Usually little at month end, because most batches finish the same day. Overnight dough or a levain is WIP, but it's often small enough to ignore with your accountant's agreement.

What is the difference between work in process and finished goods?

Work in process is started but not ready to sell; finished goods are ready. When a batch finishes, its cost moves from WIP to finished goods, and when it sells, to cost of goods sold.