What it means
Imagine a furniture maker with a table that has been cut and assembled but not yet sanded or varnished. That table is no longer raw timber, and it is not yet ready for sale.
Its value, which includes the materials used so far, the labour spent on it and a share of factory overheads, is recorded as goods in process. The value is made up of three elements: direct materials, direct labour and manufacturing overhead.
Direct materials and labour can be traced to a specific job, whereas overhead covers things like factory rent, power and supervision, which are shared and allocated using a sensible basis. Together they show how much the business has invested in unfinished output.
On the balance sheet, goods in process appear within inventory as a current asset. When production is completed, the cost moves into finished goods, and when the product is sold, it moves into the cost of goods sold.
This flow is the basis for working out the cost of goods manufactured in a period. The balance matters for cash management.
A large amount of goods in process means a lot of money is tied up in production, and long production times make this worse. Managers try to shorten production cycles and reduce unfinished work so that cash returns to the business sooner.
Valuing goods in process takes judgement, because items are at different stages. Businesses often estimate a percentage of completion for each batch, and auditors check these estimates at the year end.
Mistakes can distort both profit and the balance sheet, which is why year-end counts of unfinished work are watched closely. Businesses with long production runs, such as shipbuilding or large construction projects, may account for unfinished work differently.
They may recognise revenue as work progresses instead of waiting for completion, using rules for long-term contracts. The accounting standards that apply differ by country, so finance teams should check the policy that suits their industry.
In practice
Real-world examples.
Example
A boat builder has several hulls at different stages of construction at the end of the quarter. The accountant values each at the cost of materials and labour spent so far, which totals $640,000 and is shown as goods in process.
Example
A commercial printing company has jobs that have been printed but not yet bound or delivered. The finance team counts them as goods in process at the end of the month, and releases the cost to finished goods as jobs leave the bindery.
Example
An aircraft parts supplier has components that take eight weeks to produce. Its finance director sees that goods in process have doubled, and discovers that a shortage of one material is holding up completion and tying up $1,500,000 in cash.
Formula
Calculation
Cost of goods manufactured = Beginning goods in process + Manufacturing costs added during the period - Ending goods in process
A manufacturer starts the month with $50,000 of goods in process. During the month it spends $400,000 on materials, labour and factory overheads. At the end of the month, $70,000 of goods remain unfinished. The cost of goods manufactured is $50,000 + $400,000 - $70,000 = $380,000. That $380,000 is the cost of products completed during the month and transferred to finished goods.Case study
Seen in the real world.
Ironbridge Fabrication is an illustrative, fictional maker of steel frames. Its production manager reported that output was healthy, but the finance director noticed that cash was tight even though sales were growing.
A review showed that goods in process had risen from $200,000 to $450,000 over six months because jobs were waiting for a single paint line. The extra $250,000 of unfinished work was cash that could not be collected from customers until the frames were completed.
By adding a second shift on the paint line, the company cut the waiting time and reduced goods in process to $260,000. The illustrative lesson is that unfinished work is a use of cash, and shortening the production cycle releases it.
Watch out
Common mistakes.
- Counting only raw materials and finished goods as inventory and forgetting the unfinished items in between.
- Leaving out labour and overhead when valuing goods in process, which understates the asset and distorts profit.
- Assuming a high balance is a good sign, when it can indicate bottlenecks that tie up cash.
Questions
People also ask.
Is goods in process the same as work in progress?
Yes, the terms are used interchangeably, with work in progress being more common in some countries.
Where do goods in process appear in the accounts?
They appear in inventory within current assets on the balance sheet.
Why does it matter for cash flow?
Money spent on unfinished goods cannot be recovered until the goods are completed and sold.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%