Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Goods in Process

What it is:

Also known as work in process (WIP), goods in process are the component of a company's inventory that is partially completed. 

How it works (Example):

Goods in process = (operating inventory goods in process + raw materials used during the period + direct labor during the period + factory overhead for period) - ending inventory

The value of that partially completed inventory is recorded as goods in process on the asset side of the balance sheet.

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, Company XYZ 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 goods in process on left-hand side of the balance sheet (that is, they are recorded as assets).

Why it Matters:

For obvious reasons, goods in process are not worth as much as completed goods, but they are worth more than raw materials because they have benefited from some labor and overhead.

Changes in the amounts of goods in process can be telling. For instance, an increase in goods in process 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). Widespread increases in goods in process for an industry or entire economic sector may indicate economic growth. Likewise, decreases may indicate a pending slowdown.